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Public Bill Committees

Debated on Wednesday 19 October 2022

Financial Services and Markets Bill (First sitting)

The Committee consisted of the following Members:

Chairs: †Mr Virendra Sharma, Dame Maria Miller

Bacon, Gareth (Orpington) (Con)

† Bailey, Shaun (West Bromwich West) (Con)

† Davies, Gareth (Grantham and Stamford) (Con)

† Davies, Dr James (Vale of Clwyd) (Con)

† Docherty-Hughes, Martin (West Dunbartonshire) (SNP)

Eagle, Dame Angela (Wallasey) (Lab)

† Grant, Peter (Glenrothes) (SNP)

† Griffith, Andrew (Financial Secretary to the Treasury)

† Hammond, Stephen (Wimbledon) (Con)

† Hardy, Emma (Kingston upon Hull West and Hessle) (Lab)

† Hart, Sally-Ann (Hastings and Rye) (Con)

† McDonagh, Siobhain (Mitcham and Morden) (Lab)

† Mak, Alan (Havant) (Con)

† Morrissey, Joy (Beaconsfield) (Con)

† Siddiq, Tulip (Hampstead and Kilburn) (Lab)

† Tracey, Craig (North Warwickshire) (Con)

Twist, Liz (Blaydon) (Lab)

Bradley Albrow, Kevin Maddison, Committee Clerks

† attended the Committee


Victoria Saporta, Executive Director of Prudential Policy, Prudential Regulation Authority

Sheldon Mills, Executive Director of Consumers and Competition, Financial Conduct Authority

Sarah Pritchard, Executive Director of Markets, Financial Conduct Authority

Emma Reynolds, Managing Director, Public Affairs, Policy and Research, TheCityUK

David Postings, Chief Executive Officer, UK Finance

Chris Hemsley, Managing Director, Payment Systems Regulator

Charlotte Clark CBE, Director of Regulation, Association of British Insurers

Karen Northey, Corporate Affairs Director, Investment Association

Public Bill Committee

Wednesday 19 October 2022


[Mr Virendra Sharma in the Chair]

Financial Services and Markets Bill

I have a couple of preliminary announcements to make. Hansard colleagues will be grateful if Members could email their speaking notes to Please switch electronic devices to silent. Tea and coffee are not allowed during sittings.

We will first consider the programme motion on the amendment paper. We will then consider a motion to enable the reporting of written evidence for publication and a motion to allow us to deliberate in private about our questions before the oral evidence session. In view of the time available, I hope that we can take those matters formally, without debate.



1. the Committee shall (in addition to its first meeting at 9.25 am on Wednesday 19 October) meet—

(a) at 2.00 pm on Wednesday 19 October;

(b) at 9.25 am and 2.00 pm on Tuesday 25 October;

(c) at 11.30 am and 2.00 pm on Thursday 27 October;

(d) at 9.25 am and 2.00 pm on Tuesday 1 November;

(e) at 11.30 am and 2.00 pm on Thursday 3 November;

2. the Committee shall hear oral evidence in accordance with the following Table:




Wednesday 19 October

Until no later than 10.10 am

Prudential Regulation Authority Financial Conduct Authority

Wednesday 19 October

Until no later than10.40 am

TheCityUK UK Finance

Wednesday 19 October

Until no later than 10.55 am

Payment Systems Regulator

Wednesday 19 October

Until no later than 11.25 am

Association of British Insurers Investment Association

Wednesday 19 October

Until no later than 2.25 pm

The Bank of England

Wednesday 19 October

Until no later than 2.45 pm


Wednesday 19 October

Until no later than 3.10 pm

Access to Cash Group Fair by Design

Wednesday 19 October

Until no later than 3.10 pm

New Financial

Wednesday 19 October

Until no later than 3.55 pm

Association of British Credit Unions Ltd. Building Societies Association

Wednesday 19 October

Until no later than 4.10 pm


Wednesday 19 October

Until no later than 4.25 pm

Innovate Finance

Wednesday 19 October

Until no later than 4.40pm

Mr Martin Taylor

3. proceedings on consideration of the Bill in Committee shall be taken in the following order: Clause 1; Schedule 1; Clauses 3 to 7; Clause 2; Schedule 2; Clause 8; Schedule 3; Clauses 9 to 13; Schedule 4; Clauses 14 to 20; Schedule 5; Clause 21; Schedule 6; Clauses 22 to 46; Schedule 7; Clause 47; Schedule 8; Clause 48; Schedule 9; Clause 49; Schedule 10; Clause 50; Schedule 11; Clause 51; Schedules 12 and 13; Clauses 52 to 63; Schedule 14; Clauses 64 to 73; new Clauses; new Schedules; remaining proceedings on the Bill;

4. the proceedings shall (so far as not previously concluded) be brought to a conclusion at 5.00 pm on Thursday 3 November.—(Andrew Griffith.)


That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(Andrew Griffith.)


That, at this and any subsequent meeting at which oral evidence is to be heard, the Committee shall sit in private until the witnesses are admitted.—(Andrew Griffith.)

Copies of written evidence that the Committee receives will be made available in the Committee Room and circulated to Members by email. We will now go into private session to discuss lines of questioning.

The Committee deliberated in private.

Examination of Witnesses

Victoria Saporta, Sheldon Mills and Sarah Pritchard gave evidence.

Before we start hearing from the witnesses, do any Members wish to make any declarations of interest in connection with the Bill?

I have money saved and invested with Nationwide building society, which has submitted evidence on its own account. I am also with a credit union that I believe is affiliated to the association of one of the witnesses.

I am a vice-chair of the APPGs on environmental, social, and governance and on financial markets and services. I also spent 14 years in financial services and my wife works in financial services.

Anybody else? No.

We will now hear oral evidence from Sheldon Mills, interim executive director of strategy and competition at the Financial Conduct Authority; Sarah Pritchard, executive director of markets at the Financial Conduct Authority; and Victoria Saporta, executive director of prudential policy at the Prudential Regulation Authority. Before calling the first Member to ask a question, I remind all Members that questions should be limited to matters within the scope of the Bill and that we must stick to the timings in the programme order that the Committee agreed. For this panel, we have until 10.10 am. Will the witnesses please introduce themselves for the record?

Sarah Pritchard: I am Sarah Pritchard, the executive director of markets at the Financial Conduct Authority.

Sheldon Mills: I am Sheldon Mills, the executive director for consumers and competition at the Financial Conduct Authority.

Victoria Saporta: I am Vicky Saporta, the executive director of prudential policy at the Prudential Regulation Authority.

Q Good morning. Thank you for appearing before the Committee. I have a general framing question to open up the conversation. I suspect that the Chair would like you to keep your answers short, because I know many colleagues on both sides of the Committee want to come in.

The opportunity of the Bill, which will be the first piece of ab initio legislation for 23 years in the financial services domain, is to help the effective functioning of financial markets in society and to help the economic prosperity on which we all depend. Will you talk a little about how you see the opportunities in the Bill? How do you think about the competitiveness of the UK regulatory corpus? How would you advise the Committee on making the best advantage of changes in technology—such as digital ledger technology, but that is just one—and of the opportunity to pare back the corpus of inherited European legislation to those purposes?

Victoria Saporta: Thank you, Minister. I very much agree with your comment that the Bill presents a unique opportunity to set a framework for financial services that is world leading and the best in practice internationally. In my view, the Bill as introduced on First and Second Reading achieves that.

I will pull out a couple of things that I think are particularly important. Best international practice, as set out by international standards setters and the IMF, is for operationally independent regulators to pursue technical rule making based on the framework and objectives set by Government. That is because there is plenty of empirical evidence that the operational independence of regulators is associated with better financial stability and economic stability outcomes. That is very much recognised among the financial regulatory community internationally, and it supports competitiveness.

That is important, particularly for a global financial centre, which we have the pleasure to have here in London and the UK, because, as the IMF said in its recent FSAP of the UK, financial stability is a global public good within the UK. Our actions over here, as we have seen in recent events, can spill over to other markets. It is therefore very important that we have this high international standing so that regulators who allow firms to come to London to be regulated by us can have trust in that.

The Bill achieves all of that, but it gives us greater powers, and with greater powers must come greater accountability. We at the PRA and the Bank really welcome that greater accountability. We always have seen our policy frameworks as being supported by accountability to Parliament, and the various provisions and amendments support that.

On competitiveness, there is a new secondary objective that did not exist before, which says that we must pursue competitiveness and growth in the medium and long term as a secondary objective. That is, as long as we are advancing safety, soundness and financial stability within the PRA’s remit, we should look at the options that advance competitiveness and growth in the medium and long term.

We think that is the correct balance. It will allow us to take a very proactive approach to competitiveness. The PRA issued our approach to the Bill, as it currently stands, to aid accountability to you. In that discussion paper, we set out some thoughts about how we would go about doing that. The Bill also has certain areas that would help fintech in the UK.

Q Does anyone want to more directly address my question on competitiveness and opportunity?

Sheldon Mills: I will be brief, in the interests of time. Clearly, the Bill represents a significant opportunity—almost a once-in-a-generation opportunity—to transform financial services regulation. There are a few components to that. The first is the fact that the regulators will be given the powers to transpose the retained EU law into UK law. That provides an opportunity for us to think in terms of the UK financial services system and what we need to support UK financial services and ensure that we are a leading centre, worldwide, for financial services.

We welcome the other opportunity in the Bill—the secondary competitiveness objective—on the basis that it provides a spur to us to think about growth and competitiveness as we pursue our primary objectives of competition, consumer protection and market integrity.

The final point, which goes to your point about the corpus of rules, is that I think some of the powers, and some of the exhortations in the Bill for us to review our rules, are important. It is important for us always to have an efficient rule book and system so that we do not place as much burden on business as we otherwise would, and so that the system is certain, consistent and effective. There are genuine opportunities in the Bill.

Q I thank the panel for coming today. The Government announced on Second Reading that they intend to introduce an intervention power enabling the Treasury to direct a regulator to make, amend or revoke rules in matters of significant public interest. Do you think such a move would represent a significant departure from the UK’s model of regulatory independence, and would such a power affect your regulatory decision making process? Sheldon Mills, you touched briefly on that, so may I ask you first?

Sheldon Mills: Of course. It is a matter for Government as to what amendments they put to Parliament, and it is then a matter for Parliament as to what you do with them. You always have to be careful as a regulator not to tell Parliament what to do, but I will put some thoughts forward.

Independence needs to be at the heart of the regulatory system, so I think it will be important, if and when that amendment is put forward, to think about how the independence of the regulators is sustained. I understand from Government pronouncements that there is a commitment to the independence of the regulators, and that the proposed amendment, which I have not seen, is meant to ensure that where a public interest mechanism is needed—where the Government wish to think about the public interest—there is one to bring forward.

I have worked in regimes with public interest tests. I ran the mergers division at the Office of Fair Trading and the Competition and Markets Authority, and my learning from that is that, if put in place, such a test should be used exceptionally and with care, and that there should be specificity about the matters of public interest—in this case, financial services—on which it would be used.

We are working constructively with HMT in relation to this, and we would do so if such a power were introduced. The only point I would make—Vicky may come to this—is that the standing of the UK financial system is also built on its independence and its consistency of regulation, and it is important that we think through that as we design this regime.

Victoria Saporta: I very much agree with what Sheldon said. We have not yet seen the amendment, so we have to reserve judgment on it, but it will depend on the formulation.

A formulation whereby the Government can force or direct us to make or amend rules that we have already made, and that fall squarely within the statutory objectives that Parliament has given us, may be perceived as undermining operational independence and all the benefits that I talked about earlier. That could have adverse implications for our international standing and, ultimately, our competitiveness.

A formulation that is squarely outside our objectives—for matters of national security, for example—and does not have to do with safety and soundness, or the other objectives and “have regards”, could be a different matter if it is tightly done.

Finally, sometimes I have read in the press and in previous ministerial comments that it makes sense in a parliamentary democracy to ask the regulators to take another look. I just want to say that in clause 27 there is a review power that gives the Treasury powers to force us—to direct us—to take another look and, indeed, to appoint a third party to do so.

Q Good morning to the witnesses. Mr Mills, you mentioned to Ms Siddiq that you had not seen the proposed amendment. Has the FCA been consulted at all about the text or the principle behind that amendment?

Sheldon Mills: Of course we have had discussions with HMT in relation to the proposed amendment. I personally have not seen it.

Q Thank you. When you appeared before the Public Accounts Committee earlier this year about the British Steel pensions scandal, you and your colleague indicated that many of the things that MPs might have expected you to do to protect British Steel pension holders, you did not have the power to do at that time. Does the Bill, as it currently stands, give you sufficient powers to intervene in the way that we would have liked in the event of another pension scheme getting into difficulty?

Sheldon Mills: That was some months ago, but I recall that in the context of the British Steel pension scheme we have a power that allows us to do some particular things that provide redress en masse for British Steel pension holders. That is what we are using. We have most of the powers that we need to support British Steel pension scheme holders. The Bill does not interfere with any of our existing powers. I do not think it gives us any additional powers that are relevant to the British Steel pension scheme holders issue.

Q I was thinking particularly about the powers to stop the damage from being done, rather than simply the power to pay financial redress, which usually takes a long time, is very stressful for victims and sometimes comes too late for victims who do not live long enough to see the compensation. The gross misbehaviour of a large number of financial advisers led to that scandal and many others. Are you telling us that, as it stands, the Bill does not give you significantly greater powers to intervene and get these people out the market as soon as you realise there is a problem?

Sheldon Mills: I think that what we would have said—I would need to look at the record to see the context—is that, effectively, we have to go through due process and understand the evidence and the data that would be there to see how those independent financial advisers are behaving. Therefore, the speed and processing of that may be what we were referring to.

If I remember at the time in relation to the British Steel pension scheme, the law was changed to allow people to exit their pensions under pensions freedoms. There was a range of issues in relation to understanding how independent financial advisers were going to respond to that. The speed and pace with which they did respond led to issues such as some of the challenges that British Steel pension holders have now. To confirm: there is nothing the Bill that specifically gives us additional powers in relation to those individuals.

Sarah Pritchard: I want to come in on a slightly broader point, which is that in the transfer of retained EU files, which encompasses part of the Bill, there are some EU files where, at the moment, the FCA will have limited lawmaking powers. The Bill will provide a framework that, file by file, the FCA will need for rule-making and enforcement powers to be considered at that time. That does not answer your question specifically in relation to British Steel, but it provides a mechanism, so you go through that analysis and assessment file by file.

Q I thank the panel for coming this morning. I have two questions. Can we be clear that in the UK regulatory landscape and the international financial regulatory landscape there are public interest tests that are operated but do not affect the operational independence of regulators?

Victoria Saporta: In the financial regulatory space, the only example I know of where there is a test whereby the Government—I am not talking about Parliament—can intervene and revoke regulatory rules is in Australia. APRA—the prudential regulatory authority in Australia—has never been exercised. Whenever the IMF has done financial sector assessments, it has been critical. There are provisions, again in Canada, but the US system does not have any. It is Congress who can revoke material pieces of regulatory standards within 60 days. This is my understanding of it in financial regulation, which is separate to how it might exist in other types of regulation.

Q But in the US there is obviously a different system in terms of the scrutiny of the financial system, which is probably why that power is vested there. I think that, from what Mr Mills said, there is actually already a public interest test in the CMA.

Sheldon Mills indicated assent.

I just wanted to ensure that was on the record. Can we talk a bit about the metrics and transparency you might use to show that you are meeting the secondary objective—that the cost-benefit panel’s analysis will be transparent—and also how you consider you will need to show that you have met the accountability tests?

Sheldon Mills: Sure. I am happy to start with that. We are waiting to see the final description of the clause on competitiveness. Its current iteration talks about competitiveness and growth. It also talks in terms of the medium and long-term growth of the financial services sector and the UK economy. We have started to think about what the input measures we might see. Those are the things we can act upon ourselves.

A good example of that would be our gateway—our authorisations process. Is it as efficient as it can be? Does it place unnecessary burdens on time, pace and the application of it? That can help with the entry of firms into the UK. That is important. We are doing work on our gateway now. That is something on the input measures, but we then need to think about the outcomes. It is important to think about what data and metrics are available that have a causal chain between some of the activity we have—our authorisations activity, our policy activity and so on—and the outcomes we are seeking to achieve. One of the challenges we have is that the data on the link between financial services activity and growth and competitiveness—regulatory activity—is not significant. That said, we are looking proactively to see what measures we can find.

There are also two components to those outcomes. There is the activity that our financial services industry is providing, such as lending and support in terms of insurance and so on to UK firms and overseas. Then there is an outward form of competitiveness, thinking about how our UK plc financial services industry is doing in exporting financial services across the world. Both of those will be outcomes we will need to find measurements on.

Finally, there is the meta outcome. There is certainly Office for Budget Responsibility data that talks about sustainable growth. What is the higher level growth-type outcome you can look at and seek to link? I do not have the full gamut of that, but we are working very closely on it, so that we can provide measures and metrics that can support our use of the objective.

Q And those would be transparent?

Sheldon Mills: Of course, absolutely. We will be transparent on that.

Q Good morning. Sheldon, I read a speech of yours before about financial inclusion; I know it is something you care about. On the Treasury Committee, we have had a conversation similar to the one we are about to have. You probably know what I am going to ask you.

The Government have opted so far to not have a “have regard” for financial inclusion in the Bill. Do you believe that such a “have regard” for the FCA would ensure financial inclusion as a greater priority for the regulator? What else could be done with the Bill to ensure that financial inclusion is given a greater prominence?

Sheldon Mills: I hope we won’t have the same conversation as before. We have done some more work on financial inclusion following our conversations. Our position is still the same: we do not think we need a “have regard” on inclusion. We don’t think that that would add to our ability to act within our remit in line with our objectives. We have our consumer protection power and we have put in place our new consumer duty, which asks firms to meet a higher standard. We feel that we have sufficient powers to fix any problems that we feel we need to solve.

As we discussed last time, the regulator’s role is to support firms and the market to deliver to as many consumers as possible, including those who are vulnerable or might be excluded. However, we do not do that alone; we do that with partners such as Government, local authorities, charities and others. In relation to that, we are taking a proactive role and arranging a financial inclusion policy sprint in the autumn, working with Fair4All Finance and others. We will bring as many actors as possible into that space, using our innovation labs to work through the types of innovative activity we can put the financial services industry to in terms of tackling financial inclusion.

At the moment, we do not think we need a “have regard” given our current remit and the powers we have.

Q As we have discussed before, the current system is not working for everyone because too many people are excluded. We have also previously asked what happens to the customers who nobody wants, in terms of financial inclusion. Are there any other opportunities in the Bill to strengthen your role within financial inclusion? With respect, what has happened so far has not been altogether successful.

Sheldon Mills: I have worked with HMT and supported the inclusion of a few things in the Bill that might help with this matter. One reason why the financial services sector has adopted more of a risk-based approach to the customers it serves relates to the risks it faces of follow-on redress and other damages. There is always a balance between what you pay out to consumers who might well be harmed now and what happens with future consumers.

In the Bill, we have a duty of co-operation between us, the Financial Ombudsman Service and a few other regulators. We will try to ensure that we are managing some of the extensive use of claims management companies, which puts quite a lot of pressure on firms. Firms should pay redress and compensation where that is necessary, but there is a lot of pressure on those firms. We have to have a reality as to how things work in how the commercial world. That means that boards can then become more risk averse in terms of the services they offer.

I am keen to get some of our largest and smaller institutions innovating around expanding the number of customers they serve. People are keen, but we have to have the balance of how the system works in order to support that.

Another area in the Bill, or in our proposals, that will help is in relation to credit unions. After our action against certain high-cost, short-term credit firms, we are already seeing that credit unions are taking more of a share of credit being provided to people who might be in a category that borders on exclusion. Anything that can support credit unions safely expanding—I have the PRA to my left—will be really helpful for the communities underlying this discussion.

Q Good to see you again, Sheldon. Can you confirm whether you know of any country in the world that has a competitive objective for its regulators?

Sheldon Mills: I’m not aware of one. Vicky?

Victoria Saporta: Singapore has one. Its financial stability, however, is primary; it overrides the competitive objective, which is secondary. There is the Hong Kong Insurance Authority. Otherwise, it is not common, particularly for prudential authorities, which is what I know about.

Q Australia and Japan also have regulators with a competitive objective. Would you regard Singapore, Hong Kong, Japan and Australia as being robust regulatory financial centres?

Sheldon Mills: We do not like to comment on other financial centres, but, yes, I would consider them to be robust financial centres.

Q You consider them to be robust financial centres. Would you consider those financial centres of Japan, Australia, Singapore and Hong Kong to be competitive financial centres to the United Kingdom?

Sheldon Mills: Yes, in certain respects.

Which respects?

Sheldon Mills: I think they are competitors to the financial services system. The UK is extremely strong, varied, and has a multiplicity of financial services. Some of the competition that comes from some of those regions is quite specific in terms of what it seeks to compete with. We have a very broad-based financial services system.

Q Thank you. Sarah, how do you believe the secondary competitiveness objective might change your behaviour and your policy making?

Sarah Pritchard: From an FCA perspective, it is very much as Sheldon has said. It is important to say we support the Bill as it is currently framed. We think a secondary competitiveness objective can work alongside our primary statutory objectives. It will give us another lens through which to look at the policy work and the development of the regulatory agenda that we are taking forward. Back to the points raised previously on transparency and accountability, it will give us another method by which we will be reporting and considering our outcomes against. We will take that into account. We think it can work as a secondary objective.

On the various elements that make up competitiveness that have been touched on earlier, I think that innovation and ensuring that we can stay ahead of the game with the pace of development across the financial services markets is really important. You can see the financial markets infrastructure sandbox proposals contained within the Bill. There are proposals there on critical third parties as well, so you can already see on the face of the Bill in those particular areas a real desire to make sure that the UK can stay in lockstep or stay competitive as a country enabled through the way in which the financial services regulatory framework is developed going forward.

I think the agility is important. We often hear that regulators are too slow. Sometimes we hear that regulators are too fast in terms of putting out too many consultations. Clearly there is a balance there. We have shown ourselves able to act at speed through the Russia-Ukraine conflict and introduced new rules on side pockets to enable support in that context of war. We will need to maintain that flexibility to be agile when we need to, while retaining the checks and balances that are really important in terms of transparency and accountability.

Q The FCA announced in June that you would be strengthening the protection of access to banking services. Some might say that this was closing the stable door after the horse has bolted, given that 50% of branches in town centres have now closed. What powers does the FCA currently have to protect banking services, and why were you not doing that before?

Sheldon Mills: Thank you very much for the question. The first framing point to this question is to understand that banking services have and are changing, and there are many, many benefits of those changes. The move towards digitalisation of banking services provides a huge amount of support to many people who are vulnerable. My mother is deaf and the change to a digital means of banking services has transformed her life completely.

The starting point must be that we have to consider the variety of ways in which people can provide banking services. That said, we know that, locally, branches can be important for communities. It is not just branches. It is a point at which people can deposit money and take out money. You can have a variety of those. They can be branches or post offices. They can be what we are trying to encourage the industry to develop when they close branches.

Q Sorry, but my question is: what powers do you have and what are you doing?

Sheldon Mills: I am coming to it. In the light of that, what we have sought to do as we have seen firms decide to close their branches in the face of changing to digitalisation—there is the cost of keeping branches, which are very underutilised—is ensure that they look very closely at the alternatives to those branches when they go through those closure plans. We have had branch closure guidance in place for almost a year now. We work very closely with all the largest lenders and institutions to monitor their branch closure activity and ensure that they are providing appropriate services to those who need them in those localities as they seek to close some of those branches.

In terms of access to cash, the majority of the population—99.7% of the UK population—is within 5 km of a free-access cashpoint. We welcome the Government’s proposals on access-to-cash legislation so that we can get greater powers to ensure certain aspects of access to cash.

Q I am really pleased that your mother gets good access to banking services. Unfortunately, that does not extend to a lot of the people in my constituency who do not feel able to use online services, either because they do not have access to the internet or know how to use the internet or because they are frightened because they are worried about being scammed. As I understand the current rules, it is only when the last bank in town closes that there is there any consideration of banking hubs or other facilities. That is far too late for the vulnerable customers that my hon. Friend the Member for Kingston upon Hull West and Hessle referred to in her earlier question. What power does the FCA have to do something real to help those excluded customers, and what extra powers would you need in order to make that real?

Sheldon Mills: We are using our existing “treating customers fairly” principle in order to put pressure on banks to ensure that they are looking after those customers that you talk about, who are vulnerable, in those communities and providing them with alternatives to branches if they close. Our updated guidance, which is stronger, asks for those alternatives to be in place before they close that last branch in town. It also deals with partial closures and issues such as that. I have been out to many local communities in order to see the impact of branch closures, and I have been public in terms of saying to the banks that they need to pick up the pace in relation to the alternatives for those communities: banking hubs, mobile banking and other activity. We are working very closely with LINK, which is currently helping the banks with the banking hubs, and seeking to get them to pick up that pace.

Q But you are not slowing the number of branch closures, and people are still experiencing these difficulties in Mitcham. Please: I would love you to come to Mitcham—

Sheldon Mills: I would be very happy to do so.

And I will show you around. It is a great place. I will even buy you lunch in one of the cafés.

Sheldon Mills: I am sold—I will come.

Q In the case of the Halifax, I could not even convince the Halifax to come to a public meeting to talk to people about their experiences. The banks are just carrying on in the way they have always carried on—with hope of some service tomorrow. We are told that the post office will be great, but what if the post office is not accessible? What if people are worried about accessing cash right in the middle of other people and fearful of not being able to hang on to their money? What if they are disabled and just cannot get into their post office branch? These are the things that are really happening, whatever the current regulations are.

Sheldon Mills: Yes, these are real, genuine issues for people and I do understand them. We have researched some of the ways in which people access cash but also branches. It is important that all the institutions—I will not mention individual institutions—should be willing to speak to their customers and their communities as they close branches, because that is the way to understand what alternatives they need to be providing to those services. We recently worked with a major provider and we got it to pause its branch closures while it made a significant assessment and researched the needs of the local community, and then it was able to provide for that, so we are proactive in relation to this. I would be very happy to come to Mitcham and understand what is going on there.

Q Lovely. You will be very welcome; the people there would love to meet you. Finally—I crave your indulgence, Mr Sharma—I want to ask about access to cash. For most people’s constituents, access to cash is only any good if it is access to free cash withdrawal.

If people have to pay £1.99 every time they try to access £10 from a machine to keep them going for the week, that is a huge premium on being poor. In Pollards Hill in my constituency, we have only two pay-for machines, and that is what happens on a daily basis—people have to pay £1.99 for every bit of money that they get out. People take small amounts of money to try to control their budgets. We were delighted when the Co-op came to the parade, but it could not get free cash machines because its lease prevented it from having one.

Order. I am afraid that brings us to the end of the time allotted for this panel.

No. That is the time allotted for the Committee to ask questions.

Sheldon Mills: We would be very happy to write to you.

I thank our witnesses on behalf of the Committee.

Examination of Witnesses

Emma Reynolds and David Postings gave evidence.

We will now hear oral evidence from David Postings, chief executive officer of UK Finance, and Emma Reynolds, managing director of public affairs, policy and research for TheCityUK. We have until 10.40 am for this panel. Will the witnesses please introduce themselves for the record?

Emma Reynolds: Emma Reynolds, managing director of public affairs, policy and economic research at TheCityUK.

David Postings: David Postings, chief executive of UK Finance.

Q Good morning. We will alternate questions; I will try to be brief and give you a broad opening question for the benefit of the Committee. Representing practitioners in the industry, could you give us your assessment of our competitiveness, how it has changed over time and how it compares internationally? Could you give us your views on the competitiveness duty in the Bill and where that should sit, and on any other matters that relate to how the Committee should use the Bill to make the most of the economic opportunities available to us? Could each of you take that question in turn?

David Postings: Thank you, Minister. The UK is an extremely competitive financial services centre, and has been for decades. The exit from the EU provides us with some challenges and some opportunities. The Bill has been worked on by my team in conjunction with HMT and the regulators, and we are very pleased with the content, particularly with regard to wholesale and capital markets. The amendments to EU legislation that it contains are quite detailed and technical, but they help with the competitiveness of the market and of the UK in that market.

Q What is your members’ view on the competitiveness duty in the Bill?

David Postings: They welcome it. I think it is really important. It gives us balance and the opportunity to make sure that the regulator has regard to that. Ultimately, being a more competitive financial services centre will generate greater tax revenues for the UK and growth—which are really important—as well as stability.

Q Emma, the same question to you.

Emma Reynolds: Thank you, Minister. I reiterate that the UK is one of the world’s leading international financial centres. I agree with David that exiting the EU has brought both challenges and opportunities. On the opportunities that the Bill presents, we absolutely welcome the new secondary objective on international competitiveness and economic growth. The industry has been calling for that for some time. The Bill is a result of many years of the Treasury consulting our industry, and overall we are very supportive of it.

If the objective is done properly and the regulators meet it, it gives us an opportunity to tailor the UK’s regulation to our market. Obviously, we do not have 27 member states to negotiate with any more, so we have an opportunity to tailor to our market. However, we want high standards, not low standards. We want the benefits of regulation, and any changes to regulation, to outweigh the costs. We want regulation to be proportionate to the risk involved. Obviously, all that will be rooted in many international agreements to which we have signed up as a country.

We think there are great opportunities here to enhance our competitiveness, but the proof will be in the pudding, rather than the Bill itself. The Bill enables that to happen, but it is very important that the Treasury and Parliament hold the regulators to account on their new secondary objective.

Q I have one supplementary. Thank you both for those answers. It was put to me this morning that the UK capital markets raised just 1% of all global equity issuance last year. I will have to verify that statistic, but does that worry you, and should it worry us?

David Postings: If it is true, it should worry us —absolutely. I think the Bill is a good first step in addressing some of those issues. We have had the Lord Hill review, and its recommendations are contained in the Bill. The changes to the double volume cap and the share trading obligation will help the UK’s competitiveness and our ability to grow that share.

Emma Reynolds: We are in a very competitive environment, and I think the UK is losing out to New York, when it comes to listings. We need to focus on that. We should not be complacent. Obviously, there is very big competition from the Asian international financial centres, too.

Q Thank you very much for coming in to give evidence. I will ask about the intervention powers and whether TheCityUK and UK Finance have seen or been consulted by the Government on the intervention powers that they are bringing forward. When the intervention powers come in, what risks are there to the international reputation and stability of UK financial services?

Emma Reynolds: First, let me say that we have discussed this power with Treasury officials, and we have submitted a paper to the Treasury and this Committee about how it could be defined. As one of the regulators said earlier, with greater power—obviously, this Bill and the exit from the EU confer a lot of new powers on the regulators—comes greater accountability.

There is a balance to be struck between enhanced regulatory accountability and maintaining the day-to-day independence of the regulators, which is something that international investors and businesses appreciate, because it leads to a stable regulatory environment. If the intervention power is tightly defined and used as a matter of last resort, you can minimise the risks. We think it could be a very reasonable instrument and power to take, given the circumstances and the transfer of power.

David Postings: The EU regulation was constructed through primary legislation in the main, with the agreement of a number of countries in the EU. That is now being put into the rulebook in the UK, so the regulators have tremendous capability to amend those regulations. It is not unreasonable to have a power that allows Parliament to scrutinise that kind of thing. We have not seen a draft clause, but we have talked to the Treasury and the regulators about this.

The most important thing is that it is used sparingly and drawn tightly. The best overseas example that we could come up with was the Australian example. I believe that it has never been used, but it is there in extremis. It should be something that is very rarely used and not politicised. We need to get the balance between the scrutiny of the regulators and not politicising it. That is a very difficult trick to pull off, but we should be able to do it.

Q I have a quick follow-up. How do you think “significant public interest”, which is the phrase that is being used, should be defined? At what threshold do you think such a power should be triggered?

Emma Reynolds: The first question is very difficult to answer. I think it is probably one for the Government, if you do not mind me saying.

The answer to the second question is that there are occasions where regulation is not designed to meet the expected outcome—there could be a case where the regulator is not aware of national security risks—so there are occasions where such a power could be used. As I said before, it needs to be tightly defined. Defining a trigger would be useful, but equally you do not want to define it so tightly that it could never be leant on or even used. Given the amount of power that the regulators are being given, we think it is important that the broader societal and economic impact of the regulation is something that both Government and Parliament have the power to have a say in, if that regulation is deemed not fit for purpose.

Q Good morning, panel; thank you for coming. In their evidence to us a moment ago, the regulator said they would be transparent with regard to their responsibilities for accountability in the metrics and reporting of CBA, but Emma, in your written evidence to us, you suggest:

“The Financial Services and Markets Bill should be amended to include a power to require regulators to transparently report metrics”.

I wonder if you could comment on that a little, please.

Secondly, you have mentioned proportionality, and again in your written evidence to us you suggest that there may necessarily need to be more of it when we consider the risk, the nature and the scope of businesses, who they are there for and who their customers are. Does the Bill set the right tone for proportionality, or do you think there is still more we should consider?

Emma Reynolds: To take your first question, we think it is important that the regulators are not marking their own homework with regard to the secondary objective. We welcome what the PRA said earlier and the discussion paper it has put out, but we do think the Treasury could take upon itself a power to demand that the regulators report more frequently and when the Treasury has some concern about whether they are meeting the new secondary objective. We do think the Bill should go further in that regard. We do not want this objective to just be in an Act of Parliament and for it to never really be a reality. The question is, “Does this bite?” That is what a lot of our members are saying. We think there are ways that you could hold the regulators to account on that.

Does the Bill set the right tone on proportionality? At its core, it is an enabling Bill, so the proof will really be in the pudding. We hope so. Hopefully, the secondary objective will mean that the regulators will take that very seriously—that their regulation should be proportionate—so we hope so, but it remains to be seen.

Q So, like you have just said with regard to the first question, we should look at ways of making sure that that is firmly set down, rather than just a principle.

Emma Reynolds: Indeed.

Q May I ask you both about clauses 21 and 22, and digital settlement assets? Ms Reynolds, you talked about high standards. I wonder if you could both say whether you agree that the definition of a digital settlement asset is satisfactory and robust enough to safeguard consumers. It is rather broad.

David Postings: I think it needs to be broad, because the digital asset environment can change quickly, and if you define things too narrowly, you risk missing the next wave of change. Yes, I think it is good and wise to define it broadly.

Q But if the technology is moving that fast, how is Parliament—and, therefore, any legislation—going to keep up with it? That is a concern.

Emma Reynolds: The definition is broad and, as I understand it, it gives both the Government and the regulators a way to regulate in this area and bring things into the regulatory perimeter. It is our understanding that stablecoins will be the first of those digital assets. This is a very fast-moving area; the EU has its MiCA—markets in cryptoassets—regulation, which you will be aware of, which is a very broad framework. I think there is some advantage for the UK in being the second mover here, because there is some concern about some of the things MiCA has closed down. For example, it is not allowing stablecoin wallets to accrue interest. We are watching very carefully in this space, but I understand your concern about consumer protection. I think that is front of mind for our firms, and they want a level playing field as well.

Q Would that include the smaller and medium-sized companies that might be involved, not just the big players? That halo effect is a concern for others, because the definition is literally to safeguard them, not the smaller and medium-sized players in the market.

Emma Reynolds: That could be a concern, yes.

Q David, may I ask you about the role of banks in tackling fraud? The legislation focuses narrowly on APP scams. Would you welcome the introduction of a broader national strategy to tackle fraud, delivered by key Government Departments and agencies, law enforcement, major banks and wider partners in the financial services sector? Would you welcome something on fraud that is a bit broader than what is in this Bill?

David Postings: I am not sure this Bill is the right mechanism for it. We have been working closely with Government and regulators on a fraud strategy for some time, so anything that takes the agenda forward has to be welcomed, because fraud is a huge burden on society and a rising crime, but I am not sure that this Bill is necessarily the right Bill.

Q For example, would you support new provisions in this Bill to facilitate data sharing agreements on financial crimes that extend beyond the banks to include fintechs, electronic money institutions, cryptoasset firms and payment systems operators? Wider data sharing agreements could be covered by the Bill. Would you find that helpful?

David Postings: The ability to share data is one of the key things in terms of helping to prevent fraud and, after fraud has taken place, sending money back to the right place. I would need to look at the wording, because that is not in the Bill at the moment.

Q It is not, but, in principle, something in the Bill to facilitate ways—

David Postings: Anything that we can do as a country to stem fraud has got to be welcome.

Q Would you welcome something else in the Bill to look at banks unlocking suspended accounts so that money can be used for fraud prevention?

David Postings: There is provision to do that already, or at least we have taken steps to do that.

Q Okay. So, in general, would you welcome anything that we can do to strengthen provisions against fraud?

David Postings: Yes.

Q I just want to pick up on one thing you said, David. Can you confirm that the removal of the share trading obligation will make the UK a more competitive and open market?

David Postings: Yes, it will.

Q Thank you. More broadly, concern has been expressed about the Bill in some quarters that a freer derivatives market will push up commodity prices. Do you have a view on that?

David Postings: I do not have a view on that, I am afraid.

Q Do you believe that derivatives in general and competitive trading markets push up commodity prices?

David Postings: They can change the volatility in the market. They do not necessarily push the price up, but they can change the volatility.

Q Clause 1 proposes to repeal around 250 pieces of European legislation, pretty much at the stoke of a pen. The rest of the Bill then expects the Treasury to replace all those bits of legislation by a process that will allow for very minimal parliamentary oversight. Do you have concerns either that there may be a period where parts of the market are inadequately regulated or, alternatively, that there is uncertainty as to what the regulations are, because of the process of repealing something before you know what is going to replace it?

Emma Reynolds: From what is in the Bill, I do not think that is the Government’s intention. As I understand it, the Bill gives the power to the Treasury to transfer—restate—EU legislation, and we have encouraged the Treasury to think of this as a sequence, because we do not want big regulatory change in one go, as the compliance costs are quite high. We absolutely see that there is an opportunity to tailor EU legislation to our markets, so I do not think it is the case that this legislation would not apply; I think this is going to be done in a phased way.

Q You are using terms such as “transpose” and “translate”, and the representatives from the FCA that we heard from earlier used similar terms. Are we talking about almost literally translating all these documents into the English of the United Kingdom or are we talking about significantly changing the legislation as part of that process?

Emma Reynolds: That is a matter for the Government. The Bill gives the Government broad legislative powers to amend the legislation that they have transferred, as I understand it.

Q I have another question for both you. There have been suggestions that the Bill should place responsibility on the regulator to promote competitiveness. There have been suggestions that matters such as consumer protection and compatibility with the UK’s climate change obligations should be given the same importance in the regulator’s responsibilities as international competitiveness. If the Bill was amended to put that in place, would it cause significant difficulties for the financial services sector?

David Postings: It is not in the Bill at the moment. We would need to see the wording of what was proposed and the timescale. If you think about your first point, which I did not respond to, the difference is that the regulation will now be through rules rather than in legislation. We have had a fruitful working relationship with the Treasury and the regulators over the past year and a half since Brexit to produce what is in the Bill. Those changes have been well thought through with industry involvement and therefore get the balance right between protection, regulatory stability and the ability to be commercial. I would hope that, as the rules get translated over time, that process would continue.

On the green agenda, it is difficult for me to comment on something that is not in the Bill at the moment. What I would say is that we need to be thoughtful about the transition to net zero, as opposed to just the taxonomy and the drive to get to net zero. There is a danger that, in prescribing that financial institutions have a balance sheet in a particular form by a particular day, you risk not having a transition to net zero, so that whole thing needs to be well thought through. We risk financial exclusion on the back of that for consumers as well. I would urge caution rather than lumping something into the Bill at this late stage.

Q Are those comments made within the context that achieving a permanent change in net zero targets is not optional? It is absolutely necessary.

David Postings: The banking industry is 100% behind that transition, but the transition is the important point, not just greening the balance sheets of the firms.

Emma Reynolds: May I add to that? There is a huge commitment from financial services, and we also represent related professional services, in playing a part in enabling the transition to net zero. Financial services and financial regulators are an important part of a much broader picture, which is why green finance is actually led by the Department for Business, Energy and Industrial Strategy, not His Majesty’s Treasury. It is about not just the supply of green finance, but the demand for such products. If we have a transition to net zero, it has to be about every sector pursuing a transition. Financial services has a critical role to play, but that has to be done in tandem with the transition in other sectors too.

Q Good morning. Looking at the culture in the regulatory system and the culture of the regulators, do you think our regulators need a culture change? For example, do they need more commercial experience? We are looking at rules. There is a need for speed. Speed is of the essence when trying to make decisions or make things happen. Is that something we need to focus on?

Emma Reynolds: I certainly think there is room for a more commercial mindset in the regulators. This is not just about regulation by the way; it is about operational efficiency. One of the things we have been working on is delays in authorisations for senior managers, which can slow things down. There are other authorisations as well. We are encouraging the regulators to have a more commercial mindset and to be aware of the businesses’ priorities. It is not just about regulation; it is about how efficient they are. If, for example, you want to bring in a senior manager to a bank or other institution in the UK and it takes you 18 months to 2 years, you could be doing that elsewhere, and that puts us at a competitive disadvantage. So, absolutely, we think that there is room for improvement in having a commercial mindset in the regulator.

Q And more speed and less regulation.

Emma Reynolds: Proportionate regulation and—we have not got into the cost-benefit analysis panels—careful consideration of the benefits of regulation to make sure that the costs and burdens of regulation do not outweigh the benefit.

David Postings: I agree with Emma. To give a couple of examples, the cost-benefit analysis of the consumer duty had costs but no benefits—no financial benefits. The intent in the Bill to ensure that the FCA and FOS are aligned is really important as well, because it is very difficult for a financial services firm to operate in an environment where we are not clear what the rules are when it comes to interpretation down the line. That makes people cautious, which can add to financial exclusion. The point that Emma made about authorisations is also really valid: there are still significant businesses awaiting authorisation post Brexit from large foreign institutions.

Q That causes serious hold-up and affects our economic growth.

Emma Reynolds: And our competitiveness. If that can be done more quickly in another jurisdiction, business might well go there to set up or expand.

David Postings: Fundamentally, what we want is a competitive UK. We are only a small island off the mainland of Europe, but we want to generate big tax revenues to support growth in the economy. Anything we can do to help that is vital. Good, strong regulation is a key aspect of that. A nimble, commercially minded set of regulators to set that stronger regulation is vital.

Q We have a few minutes left. One perception is that this is about the City of London. Your members, I assume, hail from all parts of the UK, creating employment and wealth in Edinburgh, Glasgow and some of our other great cities. Will you expand on that a little for the Committee?

Emma Reynolds: Sure. We represent the financial and related professional services industry, which employs 2.2 million people, and two thirds are outside London, contrary the characterisation that financial services are mainly in the City of London. We are the biggest net exporting industry, and more than 40% of our exports come from outside London.

David Postings: Yes, we produce higher-paid jobs, and there are big concentrations in Glasgow, Belfast, the north-east, the north-west and down on the south coast. It is a thriving industry and one that we need to support and nurture.

Q Very quickly, the hon. Member for Mitcham and Morden raised the issue of access to cash and the reduction in banking services. The Bill contains substantial provisions to safeguard access to cash and halt the decline in banking closures and free-to-use ATMs. Do they go far enough? Will the Bill work?

David Postings: Absolutely it will work. This is something that we have been working on. We kicked this off as an industry 18 months ago. I have worked with the Treasury, the FCA and the consumer groups for the past 18 months on this. The aim is to make sure that cash provision for the most vulnerable—indeed, for all of society—is protected. The Bill will absolutely do that—through cashback without purchase, ATMs that are free for consumers to use, post office counters and shared banking hubs. Twenty-five shared banking hubs have been announced so far, and that number will increase. All that will provide the right level of cash access going forward. The banks will be subject to LINK as a body to decide what goes where, based on detailed local analysis, and then there is an operating company that banks own, which will implement the solution.

Q Is there anything you want to add, Ms Reynolds?

Emma Reynolds: No. I defer to David. UK Finance provided leadership in this area—that is where the expertise sits.

Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions. I thank the witnesses on behalf of the Committee.

Examination of Witness

Chris Hemsley gave evidence.

We will now hear oral evidence from Chris Hemsley, managing director of the Payment Systems Regulator. For this panel we have until 10.55. Could the witness please introduce himself for the record?

Chris Hemsley: I am Chris Hemsley, managing director of the Payment Systems Regulator.

Q Thank you, Chris. I think we would all agree that payment systems are an increasingly important feature of our financial system. To be fair to them, I am trying to ask all the witnesses today broadly the same open, wide question, which is this: as we think about the Bill and the importance of the United Kingdom as a location for financial services—they are a really big part of our economy and, as we have just heard, produce jobs and prosperity across the whole United Kingdom—where do you think the opportunities for us are in the Bill, not just as we diverge from European-mandated regulation, but as we embrace new technology and seek to make ourselves more competitive? I will lead you a little, because some of the witnesses have struggled to get there: who is your competitive set when you think about the corpus as well as the operation of regulation? I hope that is open enough to give you the chance to speak.

Chris Hemsley: First off, I agree with your premise. The payment systems sit behind our day-to-day lives. They underpin what our businesses can do and our daily experiences as individuals paying and receiving. They genuinely underpin our productivity, economy and society. I absolutely agree.

In terms of the opportunity in the Bill, one of the key things that we will no doubt pick up is that it provides an opportunity to correct a specific problem that we have today. Some of the powers in the original financial services banking reform framework that the PSR was created under were turned off by some European legislation, and that prevents us from acting with that full suite of powers. That is really important for competitiveness, because if we can get the rules in the system right, that allows us to build trust in digital payments, which will support the economy and growth.

The other issue that I would pull out is that there are some quite important definitional clarifications in the Bill that ensure that the payment systems regulatory framework works for cryptopayments—stablecoin. We are now a regulator of the sterling finality system, which is a distributed ledger system. That bit of future-proofing, again, allows us to seize that opportunity of new technologies and new ways of payment and to make sure that they are appropriately regulated.

Q Do you think that the PSR has the expertise and resource to effectively regulate payment systems using digital assets such as stablecoins? What I am getting to is the pros or the challenges and risks that stablecoins might pose in terms of consumer access and competitiveness. I want to hear your opinion on that.

Chris Hemsley: I think that the short answer to that is yes, but it is a challenge. We are always seeking to recruit and make sure that we have the right balance of skills in the organisation. We have a range of specialists who cover different technologies and payment systems, so it is not something to be complacent about.

The other observation I would make is that some of the risks and issues—and some of the opportunities—presented by things such as cryptopayment and distributed ledger are familiar problems, but with a different technology behind them. We are worried about our consumers’ money. Is it safe? Are arrangements for getting access to these systems fair and open? Are there competition problems? It is really important—the Bill does this—to make sure that that regulatory framework to tackle those familiar problems is also turned on for these new technologies, and that is the balance we need to strike.

Q I hear what you are saying, but it is not the same thing. I know those issues still exist with other forms of payment, but for stablecoin and digital assets, consumer protection levels need to be monitored more; consumers are more vulnerable, just because of the lack of knowledge. I am trying to get to whether you have specific tactics to ensure access, consumer protection and competition.

Chris Hemsley: We need to continue working closely with the two other principal regulators that tackle these issues—the FCA and the Bank of England—as we do today. We do that today with other technologies. We want the full framework to be turned on. With the FCA, we for example ensure that individual payment firms protect people’s money. You are absolutely right; in a world where people might not understand what a particular asset is, and its potential to reduce or substantially change in value, there is a really important role for the FCA in ensuring that firms are dealing with their customers properly. There is then a role for us in ensuring that the systems work, and that the rules are open, transparent and protect consumers, system-wide. The Bank of England ensures there is sufficient security and resilience, so that the systems actually work when we need them to, as we increasingly rely on them.

Q Perhaps we could come back, Mr Hemsley, to the issue of stablecoin. Some countries have actually banned its use; the European Union, as we have heard from the markets in cryptoassets regulation, is going ahead, along with the United States in terms of the Commodity Futures Trading Commission and the Securities and Exchange Commission, both at state and federal level, with getting regulation in process.

I am glad to see that there is some regulation in the Bill, but you used terms such as “future-proofing”. With this technology, we bandy around terms such as “innovation” and “future-proofing”. What does that actually mean, in real financial terms? Frankly, it is not the type of language that I, as a legislator, would like to see used in regulation of a market. It is not just that it is unfamiliar; it does not seem like the correct kind of language or descriptives to use when we can have an impact, predominantly on consumers who might use these commodities and assets digitally. What do you mean by “future-proofing”?

Chris Hemsley: That is a very good challenge. I want to ensure that the full regulatory framework that we have in the UK is turned on and applies properly, so that we can manage consumer protection and competition risks. That is what I mean in terms of that definition. That applies particularly to how payment systems regulation works. We have some relatively broad definitions of what can be covered. The Bill helpfully clarifies that those broad definitions of where regulation can apply are sufficiently broad. The way that the regulation works is that it still requires the Treasury to issue a designation—the Minister issuing a designation of a system—and our statutory duties and checks and balances then kick in. It is shorthand. If I try a slightly more precise framework, you need to ensure that the initial definition is sufficiently broad, so that those subsequent decisions on if and how something should be regulated can apply.

Q Forgive me, but you said there are similar issues. Frankly, there is nothing new under the sun. I am a fan of the technology, but it is the technology that has changed, not the issue. My concern is that these broad definitions, using terms such as “innovation” and “future-proofing”, do not give us the proper ability to scrutinise what is in front of us, because we are not talking about the reality on the ground. You face the same issues either in a fiat currency or a digital fiat currency.

Chris Hemsley: I agree with what you said. There are some familiar risks, and some new ones, that we need to be alive to. The fact that for the first time we could see the use of mass payment systems that are not linked to fiat is a new issue, and one that we need to manage.

I come back to an earlier point, which may help you to take decisions on the elements around definitions of what can be regulated. There is a series of gateways, almost: before something is regulated, it needs to fall within the definition of the Bill, and the Bill helps with that. There is then a test in the Financial Services (Banking Reform) Act 2013 that turns on the PSR’s powers: something needs to be designated by the Secretary of State for it to be regulated, and then our powers can apply. I want that to work. I want the definitions, the designation and our powers to work in this new context. I can see these new issues, as well as the familiar competition access issues that we have had to deal with in the past.

Q I will be super-quick. The Bill provides for the reimbursement of fraud victims who send money using the faster payment system. Could that result in a legislative barrier that prevents you from implementing mandatory reimbursement for fraud on other payment systems?

Chris Hemsley: The short answer is no. There is an additional requirement for us to bring forward proposals on the faster payment system, and we have already set them out in anticipation of that. We fully support that. The Bill does something broader. It removes this unintended consequence of European law for all payment systems. We will have the ability to use our full suite of powers, including in respect of fraud prevention, for all the payment systems.

Our powers vary slightly depending on which system we are talking about. We could apply these issues to, say, the cheque system or the BACS system, not just faster payments. We take a different approach on those systems, but the Bill allows you to turn on our full suite of powers to tackle the issues across the full suite of payment systems.

Q David Postings said that anything we could do to improve fraud prevention would be welcome. Are there any other areas of the Bill that could be strengthened to improve fraud prevention?

Chris Hemsley: I agree with what was said in the conversation you had earlier: it is really important to share data. I am not aware of particular barriers, but if there are any, I would of course support addressing them. The Bill gives us what we need: we need our FSBRA powers to be turned on. That allows us to move from the current approach, through which we have been indirectly tackling fraud, to being able to tackle it directly through the system rules.

Q Do you support data-sharing agreements and things like that?

Chris Hemsley: Indeed. We have work under way to encourage and support that.

Q PayPal Europe decided to exit accounts, including those of the Free Speech Union and the Daily Sceptic, and although PayPal reinstated the affected accounts, what happened raised concerns about the protection of freedom of speech in the UK. Are the regulators—you and the FCA—able to address the apparently unchecked ability of financial service operators, such as PayPal, to effect private economic sanctions and censorship in the UK through denial of service actions? Are legislative safeguards needed in the Bill, or in other relevant legislation?

Chris Hemsley: This is principally a matter for the FCA, so it might be best for me to follow up on it in writing, and potentially with the FCA.

That would be good.

Chris Hemsley: The PSR’s powers allow us to make sure that people have fair access to payment systems. The access to a particular payment firm’s services would be something for the FCA. I am happy to take that away and make sure that the Committee has a reply.

Q That would be helpful. Even though they are part of the temporary permissions regime, should operators such as PayPal be subject to the UK’s Financial Ombudsman Service, so that dissatisfied customers can seek redress?

Chris Hemsley: Again, that is more for the FCA, but I can offer you a general view. It is in everyone’s interests that the same risks and regulations apply to people carrying out payments business, including payment systems and payment firms. That is my general answer, but perhaps I could pick that up in correspondence, given that it falls principally to the FCA.

Order. I am afraid that that brings us to the end of the allotted time for this panel. On behalf of the Committee, I thank our witness.

Examination of Witnesses

Charlotte Clark and Karen Northey gave evidence.

We will now hear oral evidence from Charlotte Clark CBE and Karen Northey. We have until 11.25 am for this panel. Would the witnesses please introduce themselves for the record?

Charlotte Clark: I am Charlotte Clark, director of regulation at the Association of British Insurers.

Karen Northey: I am Karen Northey, director of corporate affairs at the Investment Association.

Q Good morning, and thank you for being with the Committee. I have been trying to ask every witness an open, framing question. The Bill is designed to bring our corpus of financial services regulation up to date, with a view to sustaining and, ideally, improving the competitiveness of a really important part of the UK economy that touches everybody’s life up and down the country. How important is that? Where are the opportunities in the Bill? I know this will come up, so I will lead a bit: what are your thoughts on what is referred to as the competitiveness objective, and on a potential intervention power? If you think that those would have utility for financial services firms operating in this space, why?

Charlotte Clark: Like all the other witnesses, we welcome the Bill. A lot of work has obviously gone into trying to get the right structure. That is really key in terms of how this works for the next generation. I think it was you who said that it had been 23 years since our last Financial Services and Markets Bill, so the legislation needs to work for a very long time.

On the specifics that you talked about, the competitiveness objective is key. Financial services regulation has been made in Europe for the last however many decades. As we onshore it, getting the structure right and making sure that the regulators balance different objectives is really key. We have argued for a primary, rather than secondary, objective around sustainable economic growth, partly because—as today’s debate has probably shown—competitiveness is quite a difficult thing to articulate, whereas for sustainable economic growth, it feels to me a bit easier to say how you are doing, why you are doing it and whether or not you are successful.

Culture change—I cannot remember who mentioned it—is important as regulators take on greater responsibility, particularly around policymaking. That comes to your point about the call-in power. None of us has seen it—I certainly have not seen it; I do not know whether Karen has—but nobody wants to undermine the independence of the regulators. It is incredibly important that they have their independence, particularly in their roles as supervisors and regulators. Political interference in that is not something that benefits the UK economy.

Policymaking, to me, is about trade-offs. If you are trading off economic growth against stability—we have mentioned financial inclusion and net zero—it is about balance. Sometimes, the regulator is not going to be all-knowing, and sometimes it is the role of Government and Parliament to step in and say, “Actually, we have a slightly different opinion.” I don’t think that is about undermining the independence of the regulators, though.

Karen Northey: I will focus on competitiveness and international competitiveness. The Investment Association represents investment managers in the UK who manage £10 trillion-worth of assets on behalf of clients. Of those assets, £4.6 trillion are from overseas investors. The investment management industry in the UK is truly global, and a global success story.

Our industry has two parts: the fund domicile and the activities that go behind the fund, and then the management of those assets—so the investment management side. We are a world leader in investment management, second only to the US, but the US is a very domestic market, whereas London—London and the UK; I must not forget my colleagues, particularly up in Edinburgh—is international. The international competitiveness is absolutely key to our industry.

We support the Bill. We support the secondary objective of international competitiveness; we think it is really important for our industry. Our position as an international global leader is at risk. We are the second largest and the most international, but we cannot be complacent about it. More can definitely be done to support our industry in continuing to be that world leader. That brings investment decisions closer to home. It enables greater opportunities, in terms of products and services for the wider economy, for investors, and for pension funds and so on in the UK.

Q What is the competitive set you look at? Can you give us examples of jurisdictions that we are in competition with?

Charlotte Clark: It is the United States, Bermuda, and Singapore—Europe as well, but particularly for reinsurance.

Karen Northey: For investment management, I mentioned before that the US is the largest investment management centre. We are seeing growth in other centres, close to home in Europe, but there is also a very significant China and Asia investment management centre. On fund domicile, which is more the back office where the funds are registered, Ireland and Luxembourg are obviously the key places where funds are often established.

Q Charlotte Clark, you mentioned net zero. Do you think the provisions relating to net zero in the Bill will have a significant impact in your sector, in terms of the green transition?

Charlotte Clark: I do not think that there is anything in the Bill specifically around net zero. I understand the debate about whether there should be an additional objective for the regulators around it. Obviously, net zero is incredibly important for the insurance sector. We bear the cost of climate events. The incentive on us to think about and support the transition, particularly financially, is very apparent.

I think our regulators do a pretty good job when it comes to net zero. If you think about the things they are doing, such as the stress test, the establishment of the climate financial risk forum and the work they are doing on disclosure, they are pretty much ahead of most other regulatory organisations on net zero. I guess one of the questions is: what would you want to do differently? This comes back to whether they have an objective. One of the concerns about them having an objective is whether it would be their responsibility to direct investment. Again, that comes back to what the role of the regulators in this is. In some ways, put bluntly, I think it is the Government’s responsibility to deliver net zero. We all have accountability in that, but I would not necessarily say that giving an objective to the regulator should change what they are currently doing, so I would question why you would do it.

Q I was referring to provisions in the Bill relating to net zero—as you say, it is not direct—but I hear what you are saying. I have a similar question for you, Karen. How should the regulators’ new secondary objective on long-term growth take account of investment in green industries, which is what Charlotte was talking about?

Karen Northey: Again, I would highlight that the UK is a centre for green finance and has done very well in it. It is a big part of what our members do. For risk management, investment managers have to take a long-term view, and that long-term view, by its nature, has to take into account climate change. Additionally, they play a huge role in directing finance towards transition, so there is a dual role for our industry.

In terms of a competitive and growth objective for our regulators, I agree with Charlotte that the regulators are generally doing a very good job. One of the key things in green finance is international standards and compatibility between them. There is a cross-border element to all forms of capital movement and investment, and alignment with international standards, so taking into account what is happening elsewhere is a key part of a regulator’s activity, particularly in green finance.

Q I think Charlotte partially answered my first question, which was about whether you think the objective should be a primary or secondary one. Karen, I think you said that you were happy with it as a secondary objective. First, do you think it will be enough to shift the culture of the regulator as a secondary objective? Secondly, when the FCA gave evidence it was unable to say, at this stage, what its key performance indicators or metrics would be; in the interests of helping it to form its opinions, do you have any views on that and how it could be effectively reported?

Karen Northey: On your question of whether the secondary objective is enough to change culture, I think an objective is necessary but I do not think it is sufficient—so it is necessary but insufficient. Culture absolutely has to follow. What we do not want is for it to be a check in the box when you are making a new rule for the handbook—“Yes, it will contribute to this.”

There does have to be an overall culture change, but to do that you do need the objective. I think that a lot of the ideas put forward this morning by TheCityUK around, for example, disclosure and transparency reporting on exactly how the objective is being met in each decision, will be key to that. I think we will continue to work with our regulators on that, as we currently do, but we would definitely encourage more transparency and disclosure around how individual measures are meeting that secondary objective.

Q Let me follow up before Charlotte comes in. Where do you see Parliament—not just Government but Parliament—sitting in that process?

Karen Northey: Parliament plays an important role. If I think of the various roles that, for example, the FCA plays as a rule-maker or a law-maker, as well as in supervision and enforcement, we are specifically talking about the rule-making function of regulators, which will be significantly increased. European directives are created through a process of Parliament, as well as through the Commission and Council, so if the regulators are taking on those responsibilities, it is important that Parliament then also plays a significant role in holding them to account. These are quite significant powers coming back from Europe and Parliament has a legitimate and important role that to play.

One important thing, from our perspective, is that that review and that holding to account of the regulators when they are being reviewed must be sufficiently well resourced and have access to sufficient expertise. Certainly our industry—I know this is true across financial services more generally—is willing and available to provide and help with that expertise, as appropriate. I understand that there are balances that need to be made, but ensuring that level of expertise is important, because there is a lot of this regulation and it is also very technical and across lots of different areas. Parliament absolutely has an important role to play and will need the resources and expertise to do that.

Charlotte Clark: My response is pretty similar. Part of the reason for arguing for the primary objective is that a lot of our experience is coloured or shaped by the debate around Solvency II. The Government proposed three objectives for the review of Solvency II. One was around a vibrant industry, the second was around policyholder protections and the third was around investment—getting investment in infrastructure, net zero and those sorts of things.

I would say that the regulator is still very focused on policy holder protection. While no one would want to undermine that—financial stability is the absolute bedrock of everything—it is a necessary but insufficient condition for everything else that needs to happen with regard to investment and growth. That is part of the reason why we have argued for the importance of a primary objective: that culture shift is needed. Could it be done through a secondary objective? I hope so. It is about whether there is the right reporting and the right accountability and whether the challenge is there.

These are very complicated issues. This is the joy of discussing Solvency II—I apologise if I have inflicted that on any of you. These are very complicated issues and it is very difficult to get that wider challenge. Those people who embed themselves in this day to day can slightly overrule things, rather than find a balance for the way these things are implemented.

Q I have a final question. How much of a barrier to investment is the current regulatory framework? We have heard about the time that it takes to get regulated, and the insurance and financial services all-party parliamentary group has had reports on the cost—that it is up to 14 times more expensive to be regulated in the UK. How much of a barrier do your members see that as? Will the Bill help to address it?

Karen Northey: I think that is a barrier. Previous conversations have covered authorisations of individuals and firms. If there is something unique in our sector, it is that our products also need to be authorised—the funds themselves need to be authorised. I mentioned the examples of Ireland and Luxemburg as key competitors in fund domicile: in Ireland it is possible to have approval for a fund within 24 hours. The FCA target is a month, but that does not always happen. There are definitely instances where in-depth review is important—we want to make sure that funds are meeting obligations—but sometimes they are very similar to previously authorised funds, run by managers who have a long history and so on. Definitely when it comes to fund domiciles it is something that is considered as important.

I know that the Bill focuses a lot on bringing EU legislation back, which is absolutely essential in terms of targeting certain areas so they are more fit for purpose for the UK market, but there are other areas of reform that are more homegrown that have led to challenges for our members in terms of our international competitiveness—the consumer duty was mentioned, for example, and there is the financial services compensation scheme and a number of others. It is not the only factor in making a decision, but it is definitely a factor.

Charlotte Clark: Similarly, I cannot recall a new insurance company being set up in this country—certainly not in the last 10 or 15 years. They are being set up in Gibraltar, Bermuda and other places where there is equivalent regulation. There is something about how we attract it, do it quicker and ensure that people feel that this is a good place to do business.

I will make a broader point with regard to investment and slightly contradict something I said previously about net zero. One of the things we talk about is that it is harder to invest in a wind farm than it is in coalmines. Those sorts of regulatory barriers need to be changed so that we are investing in the right things for the UK economy, particularly when it comes to net zero.

Q Karen, I wonder whether you heard the back and forth between me and Sheldon on financial inclusion. What are your thoughts about introducing a “have regard” provision for the FCA on financial inclusion? What else could be done through the Bill to strengthen financial inclusion?

Karen Northey: Financial inclusion is probably not relevant to our industry, in terms of access to bank accounts, but financial wellbeing is critical to our industry, in terms of how money is invested for the long term—particularly later in life—for individual investors. Three quarters of households use an investment manager through their pensions, for example, so it is about making sure they get the most out of their investments.

We have suggested that you address as quickly as possible the advice-guidance boundary. That might sound quite technical, but there are a large number of individuals who simply do not get financial advice because of the way the regulations work at the moment. We are encouraged to hear that the FCA fairly recently announced a comprehensive review of the advice-guidance boundary, but there are definitely things that can and should be done around enabling more people to get help, whether that be more bespoke guidance—there is lots of technology and innovation that will help without giving regulated advice, which absolutely should be the bedrock of complicated financial planning—or simplified advice. In terms of financial wellbeing, that is something we would like to see.

Q Would you have supported a “have regard” provision for the FCA on financial inclusion?

Karen Northey: On financial inclusion, it is not something that we thought was necessary, in terms of the powers that the regulators have and the role that regulators have versus the wider Government on financial inclusion.

Charlotte Clark: Our position is similar. Nobody doubts the importance of financial inclusion. Particularly at the moment when people are making very challenging decisions, things like savings and insurance can feel like a luxury. The regulator and the FCA in particular have given great importance to things like consumer duty, vulnerable customers—not a title that I particularly like because it is basically almost all of us at some point in our lives—and ensuring services are available to people in difficult and challenging circumstances. The review of advice and guidance is really important. For us, the point of retirement is key. At the moment, less than 10% of people are getting advice at that point.

Q So would you like to see measures within the Bill to strengthen that and make it mandatory that advice, guidance and financial barriers are addressed?

Charlotte Clark: I think the Bill allows for a review of MiFID—this is horribly technical, isn’t it? There is a lot of regulatory change going on at the moment and we need to get the definitions right. Whether it is simplified advice, broader guidance or just more help for people, all those things need to be thought through. I am not sure that will be done in the time and space in which this Bill will be taken forward, but it certainly gives the FCA and the Treasury the powers to make the changes that could be helpful for people.

Q May I refer to my themes of transparency, accountability and proportionality? Charlotte, in your written evidence you say that the Bill should be amended to achieve the correct balance between customer protection and proportional regulation, and that the opportunity for improved accountability is falling short. I rather detect from your evidence that you agree with what Emma Reynolds said about the regulators marking their own homework. Will you comment on that? Karen, in your written evidence you talk about an evolutionary rather than a revolutionary approach to regulation. Could you explain what you mean by that?

Charlotte Clark: That language is really important. How do we get things like transparency and challenge into the system? I am not sure that writing it into legislation necessarily leads directly to it, but there is something about getting the right mechanisms, the right debate and the right challenge between Parliament and the regulators, without undermining their independence. This is such a big change. I do not think any of us could be completely certain that we have got it right, but it is about making sure that we have got the right balance and the right mechanisms to hold people to account.

Q So you are suggesting that we should make some other amendments to the Bill to make sure that those things are there. Sally-Ann asked another witness earlier about the need for culture change.

Charlotte Clark: A good example is the cost-benefit analysis panel. At the moment, the regulators appoint people to that panel. That could be fine; it might not be. You might want a bit more independence in there and a bit more scrutiny. You might want to think about what those processes are. It is those sorts of areas where they could imbue cultural change. Dave Postings had the example of the consumer duty, whereby they told us what the cost was but not the benefits. We all have our favourite examples of regulatory change where we think, “You haven’t quite made the argument for this; you haven’t quite shown that this is going to be beneficial.” Making sure that changes is one of the things we would want to see.

Karen Northey: I will pick up on the second part of your question, on evolution versus revolution. It comes back to the fact that there is a significant amount of legislation to be reviewed. This is kicking off and enabling a significant review. Our members believe there are a lot of things in European legislation that work, and we do not want everything to go.

I harp back to the figures I mentioned before: £4.6 trillion out of £10 trillion is overseas assets. That relies very heavily on a concept called delegation, which allows UK asset managers to manage European funds. From our point of view, it is fundamental that we operate in a global regulatory framework in a way that does not put at risk what is a significant success story and a significant source of revenue and growth for our country.

The reviews that the Bill enables should be done in a targeted way, focused on those measures that will make the most amount of difference in terms of allowing the UK industry to work better. But we have always said that we are not looking for regulation to be torn up and suddenly having no regulation. This is about making modifications that will make a significant difference to our industry here in the UK.

Q The Bill intends to do that; it is not intending to rip up regulation. It intends to make us more competitive, while ensuring the primary objective.

Karen Northey: Absolutely, and I think the process that comes has to be done in a way that is sequenced in the right way to allow proper consultation and proper input.

Q Ms Clark, can I come back to your comment earlier about insurance companies having been set up in Gibraltar and elsewhere offshore but not in the UK? Do you have reasonable grounds to believe that the UK regulatory environment has been a significant factor in those decisions? Can you point to particular regulatory requirements that are preventing people from setting up insurance companies here?

Charlotte Clark: Why would you set up in Gibraltar and sell into the UK market? There is not a big market in Gibraltar.

There could be a number of reasons why UK business owners choose to set up companies offshore, including in Gibraltar, and they are not always reasons that have the best interests of consumers at heart.

Charlotte Clark: I think that is fair. I am certainly not casting aspersions on the Gibraltar regime, because they should have the same regime as the UK—equivalence with Gibraltar was in the last financial services Bill. The question would be: why would they do that if we haven’t got the right regulatory environment for companies to set up here and to have the oversight of our regulators?

Bermuda is probably a good example. If you speak to the regulators there about how they think about it, how they work with businesses and what they need to do, they have a slightly different culture. I do not think that is to the disadvantage of consumers. The Bermuda market is very similar to the London market in insurance. I do not think it is to the detriment of consumers; it is to the advantage of business, and I do not think that those two things are necessarily against one another.

Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions and the end of this morning’s sitting. I thank our witnesses on behalf of the Committee. The Committee will meet again at 2 pm this afternoon here in the Boothroyd Room to continue to take oral evidence.

The Chair adjourned the Committee without Question put (Standing Order No. 88).

Adjourned till this day at Two o’clock.

Financial Services and Markets Bill (Second sitting)

The Committee consisted of the following Members:

Chairs: † Mr Virendra Sharma, Dame Maria Miller

Bacon, Gareth (Orpington) (Con)

† Bailey, Shaun (West Bromwich West) (Con)

† Davies, Gareth (Grantham and Stamford) (Con)

† Davies, Dr James (Vale of Clwyd) (Con)

† Docherty-Hughes, Martin (West Dunbartonshire) (SNP)

Eagle, Dame Angela (Wallasey) (Lab)

† Grant, Peter (Glenrothes) (SNP)

† Griffith, Andrew (Financial Secretary to the Treasury)

† Hammond, Stephen (Wimbledon) (Con)

† Hardy, Emma (Kingston upon Hull West and Hessle) (Lab)

† Hart, Sally-Ann (Hastings and Rye) (Con)

† McDonagh, Siobhain (Mitcham and Morden) (Lab)

Mak, Alan (Havant) (Con)

† Morrissey, Joy (Beaconsfield) (Con)

† Siddiq, Tulip (Hampstead and Kilburn) (Lab)

† Tracey, Craig (North Warwickshire) (Con)

Twist, Liz (Blaydon) (Lab)

Bradley Albrow, Kevin Maddison, Committee Clerks

† attended the Committee


Sir Jon Cunliffe, Deputy Governor, The Bank of England

Paddy Greene, Head of Money Policy, Which

Natalie Ceeney CBE, Chair, Cash Action Group

Martin Coppack, Director, Fair by Design

William Wright, Managing Director, New Financial

Robert Kelly, Chief Executive Officer, Association of British Credit Unions Ltd

Robin Fieth, Chief Executive, Building Societies Association, and Director, Co-operatives UK

Mike Haley, Chief Executive, CIFAS

Adam Jackson, Policy Director, Innovate Finance

Martin Taylor, Former External Member, Financial Policy Committee, Bank of England

Public Bill Committee

Wednesday 19 October 2022


[Mr Virendra Sharma in the Chair]

Financial Services and Markets Bill

The Committee deliberated in private.

Examination of Witness

Sir Jon Cunliffe gave evidence.

We are now sitting in public and the proceedings are being broadcast. We will now hear oral evidence from Sir Jon Cunliffe, deputy governor of the Bank of England. For this panel, we have until 2.25 pm. Could the witness please introduce themselves for the record?

Sir Jon Cunliffe: I am Jon Cunliffe. I am the deputy governor for financial stability at the Bank of England.

Q76 Thank you, Sir Jon, for giving us your time today and for the work you and your team have done on the financial stability side for the past fortnight. I am sure it is very much appreciated on both sides of the House. Sir Jon, in your role you have an understandable natural bias towards the prudential side. Notwithstanding that, we heard this morning, particularly from all the industry participants, that they perceive there to be a real problem with international competitiveness, both in terms of the rulebook and its lack of agility, but also sometimes with the application of that. There are two axes: the rulebook itself and the way in which that is applied by regulators.

I do not reach a conclusion on those matters myself, but I thought it would be helpful if we could start with your evaluation of the United Kingdom’s competitiveness in financial regulation, which is one of the core purposes of the Bill, and how well you think the Bill achieves that objective of improving our competitiveness. The other thing a number of our previous witnesses talked about was which markets in the world they consider to be our competitor set.

Sir Jon Cunliffe: I thank the Committee for allowing us to give some evidence on the Bill. This matters hugely to us. I will say at the outset—this goes to your questions, Financial Secretary—that the Bill is hugely important and it is hugely important for a number of reasons. This is relevant to the competitiveness question. The system we have at the moment is basically that we have onshored the European Union system. That system—I worked in it for many years in different jobs and have been involved in much of the legislation—is designed for, now, 27 member states. It needs to ensure the single market and, although the national competent authorities do the supervision, there is always concern in the single market that you will get differences among them. A huge amount of what in other jurisdictions’ best practice is done in regulators’ rules is hardwired in primary law, and you can see that if you look at the onshored law. That system is justified by the needs of the single market and the need to bring all these jurisdictions together. As a single jurisdiction, as the UK is now, we will have much more flexibility, and the ability to act nimbly and design regulation for our particular needs, than we had in the European Union.

I can give you some examples of that. For example, my colleague Sam Woods at the PRA has put forward ideas for a strong and simple prudential regulation framework for banking. We could not do that under the European Union because we were all locked in a maximum harmonisation phase. In the parts of the Bill that are more relevant to me, around payment systems, there is a schedule that deals with digital settlement assets, more generally known as stablecoins, where we can now develop a regulatory framework that is nimble and flexible on the financial market infrastructure side, where we will see huge technological changes brought about by some of the technology we now see around encryption and tokenisation. Again, we are developing a sandbox with the FCA and the Treasury, but we can bring those much more nimbly into rule. This is a much more flexible and adaptable system, which will help in competitiveness.

It will also help because many of the requirements and the processes in the legislation we have were designed for 27 or 28 countries, and not for one. We report on things—I was there when they were put into the legislation—that were important to other countries but not to us, so there is an on-cost in process. Things that are important to us are not always fully reflected, because all European legislation is a compromise. That flexibility and nimbleness will take time, because the European acquis is very large, but it is a huge advantage for us in designing the regulatory framework that we need.

But—and that is a very important “but”. I might not agree with all the people that have given evidence, and I know the Financial Secretary would probably not expect me to either, but this needs to be underpinned by a strong, credible, regulatory system, and the independence of regulators is a key part of that. It is best international practice, but I think it is particularly important for the UK in two respects.

You can measure our financial system in different ways. The last IMF measure was £23 trillion—that is about 10 times GDP. When that system goes wrong, the cost to the nation is huge. That is not theoretical; we saw that in the financial crisis over 10 years ago. The recovery from the financial crisis, in terms of growth, was slower than our recovery from the great depression in the 1920s. The objective of sustainable growth in the medium and long term is entirely right, but strong, credible regulation is a necessity for sustainable medium and long-term growth. In the short term, there might be trade-offs, but in the long term, we can see what happens to growth if you get a financial sector of the size of ours wrong.

I might touch on the question of a call-in power, because I know you asked my colleague, Vicky Saporta, about that this morning. We have seen the power or the proposed amendment the Government intend to bring forward. Of course, we are subject to Parliament and the framework that Parliament sets for us, and we will work within that framework. However, for the two reasons I gave, I think a power to call in and rewrite veto rules that the regulator had made would, frankly, give us—me, anyway—serious concern given the history I have seen over 30 years in the UK financial sector.

Actually, it goes to competitiveness. We are—I gave you my £23 trillion number—probably the largest international financial centre in the world and we are one of the largest exporters of financial services. Regulators and regulatory authorities of other jurisdictions need assurance and need to be comfortable; they need assurance that they will not import risk from the UK or by their firms using UK financial services. That credibility of the institutional framework is very important to the competitiveness of London as a financial centre.

Of course, it is also important to the firms that locate here. They want to ensure that if they use our infrastructure—I am responsible for clearing houses and settlement systems—and if their banks locate here or trade with our banks cross-border on financial services, then they can be assured of the robustness of the underlying system.

I beg your indulgence, Mr Sharma, as I have one last point. All of that—the nimbleness, flexibility and, on the other side, robustness of the framework—needs to be fully, publicly accountable and accountable to Parliament. We welcome what is in the Bill in this area.

To the question of where our competitors are, I think the US is a large competitor in wholesale financial services. We have competitors in Asia as well, but that is more niche. A lot of particular products, asset management and the like, are located in Ireland and Luxembourg and are used by the UK.

Financial services are not linear. A service will very often be a bundling of products that come from different jurisdictions. That is very important for competition. People need to be assured that they will not import risks by dealing with the UK, and that when financial services are put together with elements from different jurisdictions or when we are competing, we actually are in line with international standards.

Q Thank you for coming to give evidence, Sir Jon. I wanted to ask a question about the intervention power, which you mentioned. We have seen in recent weeks the danger of Government signalling to markets that they are prepared to undermine or sideline national institutions. Is there a worry that, if intervention powers are brought in, the markets might think this indicates an undermining of the independence of the Bank of England?

Sir Jon Cunliffe: I have not seen the proposed amendment. I have only seen the Financial Secretary’s comments to the Treasury Committee and comments from the previous Economic Secretary at the Treasury, so I would need to look to see. I would say that the Bill as drafted gives the regulator primary and secondary objectives to make the difficult decisions that some of the witnesses this morning were complaining about. It requires us to balance different things before we come to a decision, but underlying that is the primary objective of financial stability and the safety of the system.

I do not know how often a call-in power or an intervention power would be used, and I do not know what frameworks would be around it. Of course, one cannot always assume that the intention when introduced is actually what happens five or 10 years down the line with different Governments. It is something that gives Ministers the ability to take a second judgment on the judgment the regulator has made in line with everything in the “have regards”—the secondary objective—so it would, yes, affect the perception of the independence of the regulatory part of the Bank of England.

Q Andrew Bailey wrote a letter to the Treasury Committee in July, which I am sure you are aware of. It stated:

“Anything that would weaken the independence of regulators would undermine the aims of the reforms”

implemented by the Bill. Do you think he was referring to the proposed intervention powers?

Sir Jon Cunliffe: There has been a lot of discussion. There was discussion in the consultation about a number of aspects that might affect either the independence or balance of the regulators. I know there was a discussion on the competitiveness objective, and we think it has been drafted in a very sensible way. That came up in the consultation. At that point there was also talk of an intervention power, so it would apply to that as well, I guess.

Q You mentioned credible regulation before, and I do not think anyone would argue with that. There seems to be a need to have proportionate regulation as well. The FCA confirmed in its evidence that it saw the Singapore regulation as robust, which was good to hear because, on things like insurance-linked securities, they took our regulation, but, because they have this competitiveness duty, there have been 18 new firms set up in Singapore as opposed to five here. That is about $700 million-worth of business. It seems to suggest that the competitiveness duty needs to exist. Do you accept that there are areas where we could do better and we could be more proportionate in how we regulate, particularly where we deal with more sophisticated customers?

Sir Jon Cunliffe: I should say at the outset that our responsibility is the prudential regulation. The FCA deals with a different market. On the prudential and infrastructure side that I deal with, there is not a huge amount of commerce with Singapore. Would I accept that the competitiveness of our financial sector relative to Singapore’s in the areas that I deal with has been damaged? No, I do not think I would. I do not know of any examples. I think the firms that you quoted were in the FCA area. The competitiveness of the financial system depends on many things. It depends on our openness to migration. One thing you hear most from international banks and the like is the overriding importance of getting the best talent. That is a huge advantage for the UK, which has been called into a little doubt recently, but I think is now being re-established.

The taxation regime plays a role, and then there are lots of things about the attractiveness of the location for people to live in. On making a comparison between two financial centres on how many firms have started one and how many firms have started another, and assuming that all of that is to do with the way regulation is designed, I would be careful about making comparisons on that basis. There is a lot more in it.

I will bring it back to my area if it helps. When I look at the technological changes that are coming, and when I look at the European Union, which is where we were, and look at areas where I know we have not had the flexibility to design the regulation that we would have wanted to design—there are pros and cons to being in the European Union, and we can argue about those—you have to be within a single market where the rules are pretty much set for everybody. On the rulebook as we have it now and instances where people have said, “We don’t like that part of the rulebook. We will set up somewhere else”, I do not have any instances where that has happened, but it probably has.

As these powers, which are now coming back to the UK and I think rightly coming into the regulator’s rules, are exercised, where does the regulator put the balance? What is the scrutiny of the regulator? Is there accountability? In the end, those decisions, if I can encapsulate it, lie in the way the Bill has been set up with the primary and secondary “have regards”, and those arrangements should ensure that we are competitive in future.

Q On the technological side of it and the flexibility, do you think there will be a culture shift as a result of the Bill to try and encourage the regulators to be more nimble and flexible?

Sir Jon Cunliffe: With the greatest of respect, I do not think I need my culture shifting, within the regulatory framework that we have at the moment. I have made a series of speeches on new technology and the benefits that new technology can bring and the importance of that, so I would not regard myself as in that position. Others might have a different view and are obviously entitled to it, but I certainly would not accept that, if I can make that point clear. You can look at the published statements of the Bank of England and the speeches we have made.

We welcome schedule 6 of the Bill because it will give us the powers to put in place a regulatory framework for stablecoin and digital assets used as payments. I would argue, because I hear this from lots of the fintech community in London, that they want a regulatory framework. They do not want a system where the public think, “This is unsafe. What happened to Terra and LUNA could happen to me. I could be scammed. I am betting in an unfair casino.” They actually want a regulatory system. They want it to be designed to recognise their technology.

There will always be tension between where we put the risk cursor and where the private sector would like it to be put. That is a discussion we have to have. The importance of this Bill is that it will give us the powers to get on and do it. I do not think I would accept the criticism that our culture is anti-innovation and inflexible. We need the powers and the tools to do that job and that this Bill will give us them.

Q It is good to see you, deputy governor. In June this year, at the annual lecture of the Bank for International Settlements, the former Governor of the Bank of England —who I believe is your former boss—said in relation to stablecoin, the adoption of cryptocurrency and the concerns about systemic crises:

“In baseball, it’s three strikes and you’re out. In cricket, it’s only the equivalent of one. For systemic payment systems, one is too many. If that means, as it must, very rigorous oversight and rules for private stablecoins, what would then differentiate them from CBDCs?”

First, could you answer the former Governor’s question—what then does differentiate them from a central bank’s digital currency? Secondly, I am glad to hear you rightly say that the industry wants good regulation; is this regulation rigorous enough to enable that to happen?

Sir Jon Cunliffe: I do not normally contradict my ex-colleague and boss, Mark Carney, but I would say a number of things. On the landscape, let us be clear about what we are talking about: we are not just talking about new forms of payment systems; we are talking about new forms of money. Most of us do not realise it, but when we use our credit card, phone or cheques—if we use cheques—we are exchanging private money, which is our deposits at commercial banks. What these stablecoin proponents propose to do is create a new settlement asset—that is, a new form of money—to be used in transactions. I think that is why Mark said that when a payment system—the money going through it and the mechanism for transferring it—breaks down, then one of the basically essential services in the economy, like water or electricity, breaks down and transactions cannot happen. So you do not get one strike: if the payment system goes down, people cannot transact at scale. This is fundamental infrastructure, if I can put it that way.

The money that travels through these payment systems is also fundamental to society. It needs to be robust and safe, and history has lots of examples of what happens when people lose confidence in the safety of the money they are holding and transacting. That is why these things are crucially important. However, 95% of the money that we use in our economy is not public money from the Bank of England but private money from commercial banks, and I do not see, a priori, a reason why a new form of private money could not emerge using different technology in the way that stablecoins have proposed. What I will say, and the financial policy committee at the Bank has said this very clearly, is that the money that they use and the transaction machinery that they use must be as robust as the money we are using from commercial banks or the Bank of England. The public should not need to think, “Which money am I using?” It should all be one money of equivalent value.

I think there is a world in which you have a CBDC, stablecoins, commercial bank money and Bank of England cash, which we will produce as long as anybody wants it, and those things are interchangeable and people use them interchangeably—we use the moneys of different banks interchangeably now—but the regulatory system has to be strong and make it very clear that if what you are offering is a better service, an innovation, that is fine, but if it works because it operates to a lower standard, that is not fine.

Q Let me say a little extra on that. I do not want you to conflict with your former colleague, but—

Sir Jon Cunliffe: No, no, it is fine. We are friends.

He did say this, which I take in terms of stablecoin as well:

“Ultimately, crypto either has such extrinsic value without a use case, or has a use case as an NFT that perfects ownership (which is niche by definition in that it is non-fungible).”

His critique is that it becomes niche.

Order. I am afraid that brings us to the end of the time allocated for the Committee to ask questions of this witness. On behalf of the Committee, I thank our witness.

Q Could the deputy governor write to the Committee with an answer to that question?

Sir Jon Cunliffe: I would be very happy to write something on—


Sir Jon Cunliffe: We will bring out a regulatory framework for stablecoin, but I am very happy to write on how we see it, if that helps.

We will now hear oral evidence from Paddy Greene, head of money policy at Which?. For this panel, we have until 2.45 pm. Will the witness please introduce himself for the record?

Paddy Greene: Good afternoon. I am Paddy Greene, the head of money policy at Which?. I welcome the opportunity to speak today. What is probably pertinent is that we have had some long-standing campaigns on access to cash and authorised push payment fraud.

Q Good afternoon, Paddy, and thank you. I commend the work that you do on behalf of consumers to protect them in this domain and others. I am starting each panel by asking a general question as the Minister, and we then throw it open. Could you just tell us this, starting from first principles? I am familiar with your work, but there is, I hope you would accept, always a balance to be struck—it is for this Committee to try to ensure we get the right balance in the Bill—between consumer protection and putting obligations on firms that are operating in the sector. There are sometimes firms lifting away and creating pockets where people go unbanked or unprovided for, because we have put burdens on them. I wonder whether you acknowledge that and whether you could talk about where you think the right balance lies between a vibrant, competitive sector and a sector that fulfils its social obligations.

Paddy Greene: I do accept there is a balance to be struck, so thank you very much. The simple thing is that we need to make sure, when we are talking about the financial services sector and consumer protection, that we have the appropriate consumer protection baked in, so that we have a basic level that means all consumers can participate with confidence and they know that whatever they are transacting in they are looked after and they have a form of redress. Then, once we acknowledge that we have that basic consumer protection, we obviously have some judgment to make on how far the other regulations go. I must add that when we are talking about consumer protections we mean that a protected consumer is confident, has trust in markets and will participate well, and that can lead to a competitive market, an innovative market and a market that can help with growth.

Q Let me invite you to bring that to life a little more. There is a lively debate with others— I am not sure it is the point that you will be drawn on—about consumer credit, for example. Consumer credit can be life changing. It can give people opportunities. It allows them to access capital that lets them make better lives for themselves and their families. Consumer protection can also—the more forms, checks, tests and hurdles that people have to overcome to access that provision—leave people unbanked, because providers withdraw entirely and then people are left with something that none of us would want, which is the unregulated credit sector. Can you bring that to life a little bit for the Committee with some examples of where you see that trade-off?

Paddy Greene: The trade-off between protections and consumer credit?

Between putting in place—I am not making a point; I am just trying to open this up for the Committee—good, valuable seatbelts and protections versus over-protecting consumers to the degree that large numbers of participants exit the market and then consumers are left with door-to-door, unregulated providers of credit.

Paddy Greene: Affordable credit is absolutely essential for consumers, but we need to make sure that, first of all, access to credit is regulated. We do have a particular form of credit that people are accessing now with buy now, pay later, which is not regulated at all, but consumers presume that it is. There are some basic protections we need to build in. One is to ensure that the parts of credit that people access are regulated themselves and that it is clear that consumers understand what is regulated and what is not. Then there is some basic information, such as key terms and conditions.

I am aware that some of the details in the Consumer Credit Act 1974, which is exceptionally old, are onerous, and there will be a chance to review that—I think later this year. It is about making sure we have efficient information presented to consumers. There is a balance there, but there is key information that we must provide them and there are key protections that must be baked in.

Q The Bill does have provisions for access to cash, but not many provisions for free access to cash. Do you think that is a cause for concern?

Paddy Greene: Yes, it is a cause for concern. When we are talking about consumers, for the objective in the Bill on access to cash to be met, consumers must have free access to cash. Without that, I think the objective may be undermined. It is the case that we have paid-for provision—it is in theory available now—but it does not serve the market. We must ensure there is free access to cash. A huge raft of people rely on cash. It is massive numbers, but it is also the case that they tend to be vulnerable and on lower incomes. If it is the case that it is not free, when somebody goes to take out £10, they are paying £2 to get it. That is just an example, but that doesn’t seem right. The fact is, we need to have a minimum, base level of free access to cash. We are delighted that the provisions have been brought forward and that we will have this in legislation, but for it to work effectively, it has to be free access.

Q I do not know whether your responsibilities at Which? include consumer protection, particularly in relation to the financial services market, but from your perspective do the millions of small-scale retail consumers of financial services have confidence in the current regulatory framework of the United Kingdom?

Paddy Greene: I cannot speak for small and medium-sized enterprises—I am here to represent consumers—but fundamentally I do think that the regulatory framework in this country provides confidence. I think it has been robust, relatively speaking, over the years. If we compare it to some other international sectors, I think it is a framework that can provide people with confidence. We would be remiss to weaken that in any way.

Q Does the Bill as it stands strengthen or weaken that regulatory framework? Or does it leave it as is?

Paddy Greene: We have some concerns about the current wording around competitiveness. I think we need to be mindful of that. I want to get across that whatever changes are brought in, the primary objectives of the FCA must not be inadvertently undermined. The FCA has a challenging time to balance those objectives at the moment. We would seek amendments that ensure that, from the consumer perspective, if we are going to see changes brought in, in no way shape or form do they undermine the consumer protections that are in place.

On the argument for competitiveness for consumer protection, I would add, similar to my earlier remarks, that a confident, well-protected consumer will lead to a competitive environment. It will lead to innovation and confident consumers interacting in that market.

Q I was interested that the Minister in his question used the metaphor of a good seatbelt. Some of us think that the regulatory environment for road traffic should ensure that nobody needs to rely on a seatbelt, but that is perhaps a discussion for later.

I have had a number of representations, as I think other members of the Committee have, from individuals or groups of people who have been victims of financial services scams on a colossal scale. One of their common comments is that they do not think it is justifiable for the regulators to have such a strong degree of immunity from civil liability, even in cases where it is clear that the regulator has failed and that that failure has contributed to members of the public losing what for them are significant amounts of money. Do you have a view as to whether it is time to revisit that very broad immunity that so many of the regulators have?

Paddy Greene: I am struggling to hear your questions.

I am sorry. I will try to speak into the microphone, so forgive me for not looking at you. Do you have a view on the numerous representations we have had from victims of financial scams who think it is time to revisit the very broad immunity from civil liability that the regulators have?

Paddy Greene: I will talk specifically to parts of the Bill. This is essential, but I am thankful for the provisions that have been brought forward to introduce a mandatory requirement for people who have been the victims of push payment scams to get their money back. In terms of a first step, that is crucial. On changing the regulatory framework, that is a first step and we welcome it.

Q Is there a need to specify in the Bill, or to enable in later regulation, a widening of the mandatory compensation scheme to types of scams that we do not yet know about?

Paddy Greene: Yes, I believe there is. It is right that the Bill starts with faster payments—I think 87% of APP scams are run through faster payments. We do not want to delay action. It has taken too long: it has been six years since our super complaint to get to this point, so we must not slow that down. The revisions—the two-month and the six-month provision in the Bill—are ones that we absolutely endorse. As I said, we do not want to slow that down.

We need to make sure, though, that there is an obligation for further action—for example, to look at CHAPS payments. UK Finance figures show that 79 million on CHAPS and on-us payments are already there. We know that scammers and fraudsters are very good at adapting to change, so they will move. I know there have been some debates about what the Bill does or could allow, but we need to make sure there is an obligation so that we know what will happen next. Just because there is provision for the regulator possibly to act in the future, that does not mean the regulator will—there is a lot of pressure on regulatory time and resources—so we would really like to see some clarity on what happens after the changes to faster payments are made. As I said, this is the opportunity to look at the future. We know that change is happening, so we should set out a timeframe for what happens next.

Q Good afternoon. We were just talking about access to cash and the proposals in the Bill to safeguard access to cash and free ATMs. As an MP who represents a rural constituency, I am concerned about my residents being able to access cash. How far do you think people should be expected to travel to access free cash, or cash? Is it geographically dependent? Would you treat regions separately, on density of population?

Paddy Greene: I think we need community-based solutions. The fact is that it will not be one-size-fits-all. We need to recognise that communities have different challenges. When we look at the voluntary solution that the industry has put in place, it accepts that, first, we need not only a geographical spread but a community access point. We need the ability for communities to request a review of access in their areas.

Secondly, we need a raft of delivery channels. That again gets to the point of what is fit for purpose. An ATM might well be suitable in one town, but it might not be suitable for another town for a variety of reasons, be that geographical or the demographics of that part of that society. I do not think it is one-size-fits-all. It is very important that we get the policy statement from the Treasury soon, so that we and you can scrutinise properly what the close details will be, but it should be a basic geographical spread, with the option to interrogate further those who are not captured by the geographical spread and to ensure that we do not inadvertently leave people behind.

Q So you are not necessarily specifying a mileage.

Paddy Greene: We need to acknowledge that if, let’s say, you came down to a certain kilometre base that might sound reasonable in broad terms, it would under-serve some communities, so we need to be alive to that.

Q I thank Which? for all the work it has done about the imperative of free access to cash. I do not think any of us are surprised that the Post Office announced that it had £3.45 billion taken out in cash in August, which is the highest figure since its records began. Does the Bill ensure that people will have free access to cash, or is there a need for an amendment to be very specific about that?

Paddy Greene: I think we need to be specific about the need for consumers to have free access to cash. I have concerns that the Bill could be interpreted in a way that undermines those objectives. We absolutely welcome the provision of cash legislation and I am very happy to see it here, but this is our opportunity to get it right. Consumers need confidence that they will have free access.

Q I will be super quick. Do you think we need to see regulation of buy now, pay later firms?

Paddy Greene: Absolutely. We need to see it and we need to see it very quickly. We are in the situation where a lot of people use such buy now, pay later. I acknowledge that a lot of people use it safely, but a growing number of people are struggling with repayments. It gets to the point where people presume that it is regulated. It is an unfortunate reality that lots of consumers do not really differentiate between types of financial products when it comes to the payments and credits that they use, but we need to have buy now, pay later regulated and we need to have it regulated very quickly.

Q The Bill provides reimbursement only for fraud victims who send money using the faster payments system. Do you think other payment systems should be included? Will you tell us a bit about that?

Paddy Greene: Yes. Similar to the comments that were made before, it is right to start with faster payments. We need to move to a model where we are absolutely confident—I heard the tail end of the previous evidence about different payment mechanisms and those that are emerging. We must have consumer protection baked in. We want consumers to have confidence and we know people are going to use such systems but, as we have said previously, they do not necessarily understand what is backed and the type of payment mechanism that is used.

In terms of what we want to see next, we are delighted with faster payments, but £79 million is already lost on CHAPS, on-us items and international payments. First, we need to make sure that the PSR and the Bank are talking properly about CHAPS, because when we are talking about CHAPS, we are talking about house purchases. For the people who are scammed during such a payment, there is a huge detriment, not financially but emotionally, and we know that fraudsters will adapt.

Our next steps, after we have got faster payments, are CHAPS and on-us, and we need to look at international payments. We need to make sure the regulator is looking at all the other designated payments and those that will come down the line, because we are seeing innovation, in order to make sure that the appropriate consumer protections are built in from the very start.

If there are no further questions from Members, I thank the witness for his evidence and we will move on to the next panel.

Paddy Greene: Thank you very much.

Examination of Witnesses

Natalie Ceeney and Martin Coppack gave evidence.

We will now hear oral evidence from Natalie Ceeney, chair of the Cash Action Group, and Martin Coppack, director of Fair by Design. We have until 3.10 pm for this panel. Could the witnesses please introduce themselves for the record?

Natalie Ceeney: I am Natalie Ceeney. I authored the independent access to cash review four years ago. I now chair the Cash Action Group, which is leading the industry’s work to provide a voluntary solution, prior to legislation, for providing access to cash.

Martin Coppack: I am Martin Coppack. I am the director of Fair by Design at the Barrow Cadbury Trust. We exist to eliminate the poverty premium—that is, the extra costs that poorer people pay for essential services. I am also a commissioner on the Financial Inclusion Commission. Previously, I was a regulator, responsible for setting up the FCA’s approach to consumer vulnerability and its engagement with third sector organisations.

Q Thank you for the work that you do. For the benefit of the Committee, I want to open the conversation by rehearsing some of the interventions. We all represent constituents, and obviously this is a concern on both sides of the House. What are the mechanical options for a diligent Member of Parliament, for example, if they are concerned about access to cash in a particular location? Will you talk us through that?

Natalie Ceeney: We very much modelled the voluntary scheme that we set up as if the Bill, as currently drafted, were implemented. The model starts with a community need base. The premise is that all banks will have a responsibility to serve their business and retail customers, and if they are not doing it through their own branches, they have to do it through another means.

The mechanism we set up is that anyone—any MP, any member of the public—can request that their community’s needs are reviewed. That is done independently by LINK. The form is very simple, free to fill out and on LINK’s website. LINK is already getting applications. Equally, every time a branch or an ATM is closed, LINK will review the needs of that community. If those needs are not being met, it will consider a new solution. Since 1 January, that has already led to 25 new hubs being announced and 13 communities where we are going to explore pilot services, including deposit services. LINK has also set up a significant number of ATMs; I do not have that number at my fingertips.

Q That is very clear. So there is a solution out there in the marketplace. What are the benefits of this industry-led initiative versus the legislative approach? Where do you think there are gaps, if there are any?

Natalie Ceeney: To be honest, we need both. There is a real competitive challenge for any bank that wants to go beyond what is necessary, because if it does that, it could be accused by its shareholders of wasting their money, unless all its competitors do the same. To be fair, it is the threat of legislation that has made everyone say, “Why don’t we work together?”. We do need this legislation for the industry scheme to continue in a viable way, but I am pleased that the industry has stepped up in advance of legislation.

We have worked hard not just with banks, but with consumer and small business groups, so the scheme we have designed truly has the input of everybody. We have run pilots for the last two years in communities to test that our models work, with really high satisfaction rates. We need both, but I think the scheme we have designed means that when the legislation is passed, we are ready to go; there will not be a gap.

Q Thank you for coming to give evidence. My first question, to Natalie Ceeney, is about the overlap between people who need access to cash and the people who require face-to-face banking services. I want to ask about the overlap between those pools of people, and whether you think the Bill protects banking services. I have a different question for Martin Coppack, but I will come to you later.

Natalie Ceeney: That is a very good question, and I am conscious that every time this issue is debated in Parliament or, frankly, every time I meet a community, the debate goes very quickly from cash to banking. It all merges. The reason is we are talking about the same population. If somebody needs face-to-face support with their money, which might be about getting money out, paying money in, a standing order or the fact that a payment they expected has not arrived, it is the same demographic group. We have recognised that in the voluntary scheme. When we set up a banking hub, it does not just have a counter where you deposit cash and get cash. There is also a private space where the banks provide a community banker to do basic banking services. As far as the legislation is concerned, the voluntary scheme we set up will cover that need on a voluntary basis.

There is one challenge that you might want to include in the legislation. I am going to stay neutral because of my members. The consumer groups and small business associations would say it should be included and the banks would say it should not, but if you do want to go there, defining what you mean by face-to-face banking services and particularly essential services is really important. I do not think anyone would expect you to offer wealth management or buy-to-let mortgage advice on every high street, but helping someone when they are stuck because a payment has not arrived or they have got locked out of their account feels different. Keeping that definition tight is important.

There is also a question about whether the FCA has the powers that it needs already. Those are the factors I would consider.

Q Thank you. My next question is for Fair by Design. It is about the additional costs that people on lower incomes face and the so-called poverty premium. Do you think the legislation in the Bill addresses the poverty premium, or could it be strengthened?

Martin Coppack: Absolutely not. I have worked in this sector for 20 years and we have the biggest opportunity right now to make a systemic change to how people who are excluded are addressed by both the regulator and the Government, and we need to take it. Recently I provided evidence to the Treasury Committee, which supported our call for a “must have regard to financial inclusion” for the FCA—importantly, alongside a requirement to publish once a year the state of financial inclusion, what it can do, what it cannot do, and who else can act. That is so important. If I could just give a little more context about why that is so important, I would appreciate it.

Thinking about where we are now, Governments of all different colours over the years have asked people to take responsibility for their own financial affairs—be a good citizen and look to the market, whether that is saving for a rainy day, saving for retirement, or protection products for insurance—but what happens if the market does not want you? What if the market says, “You are a higher risk and more costly to serve, so we are either going to make our products more expensive for you or we will just exclude you.”? I think everybody can recognise that situation.

With competition-driven markets, we can all agree that firms will naturally design products that are profitable. That is okay if it is not an essential service, but if it involves basic financial products and services that everybody needs, some intervention needs to happen. Over the last 20 years or so, we have been asking amoral markets to make moral decisions about who gets what product at what price and who gets excluded. The biggest issues in the financial exclusion area that are not touched by the FCA’s consumer duty coming out or by its consumer vulnerability guidance are those that lurk around income when people cannot afford a product.

I will give one example to bring this to life. It is on insurance—we have talked about this before, Craig. Increasingly, insurers are becoming ever so good at finding individualised risk per person. Technology is great for that. As a rule of thumb, the mark-up works really well if you are healthy and wealthy. If you are not wealthy and healthy, you are a higher risk, and increasingly you are asked to pay more for your insurance product. We know, for example, that people in poverty pay about £300 more a year for their insurance because of their postcode, and they pay another £150 a year on top if they cannot pay up front and have to pay monthly. Those issues go across insurance. I and many of my colleagues in different organisations spend all our time going to the Treasury and saying, “This is an issue.” The Treasury says, “We have not got the data. Go to the FCA.” We go to the FCA and it says, “The pricing of risk is social policy. It is not for us. Go back to the Treasury.”

Then you go to the Competition and Markets Authority, then the Equality and Human Rights Commission. Everybody points back to the FCA as the only body, often by law, that can get access to this information, but it refuses to because it is not a priority and not within its scope. So we are simply saying there should be a “must have regard to financial inclusion” with a requirement to publish—not to do social policy, but to allow the consumer market organisations to have a conversation about these issues that have been going on for decades. As an ex-teacher, I have a handout, which explains it in one slide.

Q Many thanks for all your work in this area. I am interested in your thoughts on the increasing number of businesses refusing to accept cash. If that becomes commonplace and we become a virtually cashless society, will that not pose a risk for SMEs, if payment transaction costs rise, for example?

Natalie Ceeney: That is a really important question. When we look at some other countries, that has been the real crisis point. In Sweden, for example, the crisis point hit when shops stopped taking cash. If you are dependent on cash, there is no point having it if you cannot spend it.

I have spoken to literally hundreds of small businesses. The main reason that they do not take cash is not hygiene or anything like it; it is the ability to bank cash. If you go back three or four years, a small retailer used to shut up for 10 minutes at lunch time, pop over the road, deposit their cash in the bank and pop back. What they might now have to do, with the local bank 20 miles away and open between 10 and 3, is to shut up for an hour in the peak of the day, drive, park, queue and drive back. No wonder many shops say, “You know what? It is only 20% of my customers. I will go cashless.”

That is why in this legislation, deposit facilities are just as important as cash access. It is an area where the industry is behind. You can have deposit-taking ATMs—they are just as well tested as ATMs that issue cash. We do not yet have any mechanism in the UK for third parties to use them. It is something that I am working with the industry to solve, but this legislation is utterly critical. If small businesses can deposit cash easily, most will keep taking it.

Q To both our witnesses, do you agree that there is a societal duty for the Government to ensure that the most vulnerable people in our society have free access to cash?

Natalie Ceeney: Yes, I do. The one thing I would say as you consider the drafting is that the Bill covers small businesses as well as consumers. Small businesses, typically, via their contracts, pay for their cash access. As you draft amendments, limiting that to retail consumers is going to be important. I do not think that there is any appetite for banks to want to charge for cash access, so I do not think that you would get any opposition to putting that in the legislation or empowering the FCA to take it through to regulation.

Martin Coppack: There is absolutely a need for this. Bearing in mind today’s audience, I did a bit of research and looked at the poverty premium at a constituency level for different MPs. It might surprise you to know that a typical parliamentary constituency loses £4.5 million a year in terms of the poverty premium. That is money that could be going into your constituents’ pockets. We have linked that to research that shows that the poorer you are, the more likely you are to spend that locally. The reason I am talking about this point right now, as well as it costing £2.8 billion across Great Britain, is that the poverty premium very much exists for people trying to access cash.

If you lived in, let us say, the Conservative constituency of Vale of Clwyd, people are paying about £40,000 to access their own money. If, for example, you were in Kingston upon Hull West and Hessle, you would be paying around £70,000 to access your own money. Say you lived in the SNP constituency of West Dunbartonshire —I cannot say it; I should have practised that before I came—people are paying £64,700 in that constituency to get access to their own money. I hope that is a good representation of why we need to tackle it.

Q Martin, as you alluded to, you gave some powerful evidence to our all-party parliamentary group last year on the poverty premium, which I think was off the back of a report from the FCA that said there were about 27 million people with characteristics of vulnerability. I think most of those were around buying insurance. In the last 12 months, has any progress been made? One of the areas we have talked about as much as cash machines is, when looking at things like insurance, the digital disadvantage that is a problem. There seems to be an ever-growing push to push people online. You are a former teacher, but I am a former insurance broker, and I think that the benefits of advice, in particular to vulnerable customers, should not be understated. What are you seeing now?

Martin Coppack: Unfortunately, not a lot of progress has been made. We have had numerous conversations with the Treasury, signposting to the FCA. Some days we have the conversation about how we do not have enough data, which we cannot get hold of—firms have their own data on insurance, how it is distributed and how the calculations are made—so, unfortunately, nothing can be taken forward.

We have now done a second piece of work. We did one with the Institute and Faculty of Actuaries, which agreed that there is a real positive premium issue. We are doing a second report with the Social Market Foundation, calling again for the FCA to collect the data and for the Treasury to understand how far prices are a market problem, so regulation can tackle it, or how far it is a social policy problem, so social policy makers can tackle it. However, we cannot get further than that. I have probably been having this conversation for the past 10 years. In our world, as an ex-regulator, if it does not get measured, it will not get done.

Q I have one quick follow-up. With that in mind, is the FCA the right one to have a remit for financial inclusion? If not, who should?

Martin Coppack: Importantly, when asking the FCA to do social policy, it would not allow it. What it is about is closing that complete spiral. Seventy-odd organisations have signed our call, and some firms. We are trying to close that loop so that we can have conversations about the most difficult things affecting the poorest of your constituents. That is all we are trying to do, and what I would urge you to support.

Q Thank you both for your work in this area. Martin, you might have heard Sheldon from the FCA earlier trying to reassure us all that we do not need to have regard to financial inclusion, and that it is all fine and there is nothing to see here. Will you elaborate? If the FCA had a “have regard” to financial inclusion, what difference would it make to the lives of people facing financial exclusion? Can you provide any examples of the interventions that the FCA could make if it had that “have regard”? What difference would it make? The FCA is saying, “It’s all fine, and we do something anyway”, and it pointed to the consumer markets—that was its answer.

Martin Coppack: Gosh, there was a bit there. Remind me if I do not get everything. First, the FCA will talk about the consumer duty and its vulnerability guidance. Neither of those touches anything to do with income. Vulnerability touches lots of things, like losing a partner or disabilities, which is great, but looking at income does not touch any of it. I have had numerous conversations with the FCA, and it is not supportive of this, but it recognises the issue, although it has not come up with an alternative.

On examples of how this would have worked well in the past—actually, I have a current one. How long has Natalie been trying to get some action here, on access to cash, before the infrastructure absolutely wilts away? It is a race against time. I was in the FCA 10 years ago, or whatever, and I saw all the letters going between Departments and the FCA to say, “Let’s not touch that. It is not in our remit.” That is a live one right now.

Past examples: the loyalty premium insurance everyone knew was an issue. It took Citizens Advice getting all its resources together to do a super-complaint to get any further on the loyalty premium in insurance. Access to basic bank accounts—Sian Williams at Toynbee Hall was going at this for years before we got any further. Those are the types of intervention that would be allowed.

On the difference at the ground level, I could go through a few more parliamentary constituencies. For example, tackling the insurance poverty premium would make a huge difference of £500 million to your constituents, James; it would make a difference of one million three hundred for your constituents, Emma. I could go on.

One other quick thing is that, when we talk to people in the community, they do not have a clue why the market is why it is. People like me can say, “Cost to serve—it’s a rational way the market is working.” But if you ring up and say, “I want car insurance,” they say, “We don’t serve you—it’s your postcode.” I have had people say, “If I cross the road in Glasgow, my life expectancy goes down by this much. The same applies in terms of my insurance going up.” People say they are lying on their insurance forms by putting different postcodes on, because they need their car because they are disabled. This is how consumers react to a system that does not work for them.

Q You mentioned before the letter and the number of people supporting the “have regard” to financial inclusion. I wonder whether it is worth sharing with colleagues who the people who support the “have regard” to financial inclusion are, and whether they elaborate on the reasons why they have supported that. Even though you are a wonderful spokesman, it is not just you supporting it, is it?

Martin Coppack: No. We have Martin Lewis on board, for example. That might surprise some people. We have Andy Briggs, chief executive of Phoenix Group. We have Lord Holmes of Richmond, from the House of Lords. We have the Legal & General Group chief executive. That is as well as other organisations that you might expect, such as Citizens Advice. There are about 70. This is not a niche area. People see it and see the need for it. It is not just Fair by Design.

Q I think both of you will agree with what I am about to ask you. Would you agree that those most in favour of a cashless society are those with the most money in their bank?

Natalie Ceeney: Yes.

Q If you look at other countries that are far more digitally enabled than the UK and Northern Ireland, notably Estonia—let me declare a non-pecuniary interest as the chair of that all-party parliamentary group—the vast majority of Estonians, who do have more or less a cashless society, believe that a cashless society or access to cash, should I say, needs to be supported with the infrastructure that you mentioned earlier, Natalie.

Natalie Ceeney: I think that is absolutely true. One thing I would say, perhaps to connect to the points that Martin has made, is, “Wouldn’t it be nice if everybody could participate in a digital society?” There is a risk that we talk about protecting cash for its own end. The reason why we are talking about protecting cash is that the most vulnerable need it, because it works better for them than digital.

We also, in parallel, need to work to a society where everyone is included in a digital economy. If you are dependent on cash, you shop locally; you cannot shop online. That means that you pay more for your goods and services. You cannot do direct debits. You probably have a prepayment meter. Actually, your costs of living, if you live on cash, are much higher. But the people who use cash are not stupid. They are not doing it because they have not worked that out; they are doing it because they have not got a choice, so I think that in parallel—this is not covered by this Bill, but it should be something that we collectively work on post the Bill—we need to work on how we include everyone in a digital society.

That is broader than financial services. In Britain, 4.5 million people do not have any kind of smartphone; 1.5 million people do not have any broadband or mobile connectivity; and 1.3 million people do not have a bank account. There are some bigger societal issues to tackle, but we have to really make sure that this is an inclusion debate.

Q Martin, you have mentioned that you were a regulator, and I think I heard you say a moment ago, “If it doesn’t get measured, it doesn’t get done.” Therefore I am keen to ask you about and understand—you have obviously looked at the Bill in its totality—the need for metrics on net zero, competitiveness and proportionality. Do you think there is enough in the Bill and that is testing and stretching enough? And do you think that there is enough transparency in relation to the regulators to show that they have met those metrics?

Martin Coppack: I am sorry: I just do not feel quite qualified to answer that one.

Q Martin, I want to ask you very quickly about all the data that you have been listing in the evidence. I take this evidence session very seriously. I think that it would be really helpful if you could share the constituency data, but also, importantly, the workings. Can you just confirm that the way in which you are working out the poverty premium is not based on a best-case counterfactual?

Martin Coppack: What do you mean by “best case”?

Q Well, it is based on either a best-case counterfactual or average consumers’ costs. Which is it?

Martin Coppack: We have a whole list. We deal with Bristol University. We do a range. We work out an average. And then we have figures that go much higher. If it is one in 10 of people who are in poverty, we would have a higher one. We have a whole range that we can present to you.

Q But is the data that you have been rattling off today to all of us specifically on the best-case counterfactual or on an average cost per consumer?

Martin Coppack: I am not quite sure what you mean by “best case”.

Q Okay. Maybe write to me with your workings and we will go from there. If you rattle off data in an evidence session such as this, it is important for you to know how that data was calculated.

How they have worked it out is on the website.

Martin Coppack: It is published by the Bristol University Personal Finance Research Centre.

That still does not answer my question. If you are going to come to a Committee such as this, please provide your data.

Order. I am afraid that brings us to the end of our allotted time for this panel. On behalf of the Committee, I thank our witnesses.

Examination of Witness

William Wright gave evidence.

We will now hear from William Wright. We have until 3.25 pm for this panel. Would the witness please introduce himself for the record?

William Wright: My name is William Wright. I am the founder and managing director of New Financial, a capital markets think-tank.

Q Thank you very much for being with us this afternoon. I am asking each witness a general opening question before handing over to colleagues. To what extent do you think the Bill fully unlocks opportunities? We have not had ab initio financial services regulation for nearly a quarter of a century. In that period, technology and trade flows have changed, and the imperative for us to remain competitive as an economy remains constant. How well does the Bill meet that objective, and who are our competitive set in the world?

William Wright: Thank you for the question and for the invitation to join you. Overall, the Bill gets just about the right balance between, on the one hand, the opportunity to reframe, tailor and recalibrate the framework for UK banking and finance, and on the other, to address the post-Brexit imperative to do so.

Inevitably, now that the UK has left the EU, we have to rework the financial architecture around regulation—the processes—now that it no longer goes through the European Parliament, the European Commission, the ECON committee and so on. The FCA, PRA and the supervisory architecture need to change to reflect that. I would add that the Bill draws the right balance, broadly speaking, in terms of not going too far, not trying to intervene too much in the specific legislative briefs in different sectors, and focusing much more on setting the framework.

On the second part of your question, on competitors, it is important to divide—for want of a better word—the City into two; it is a tale of two Cities. There is no competitor to the UK domestic side of the City, which is all about providing the right support and finance for UK companies and investors, and oiling the wheels of the UK economy. On the international side, of course, the competitive environment has changed quite radically over the past few years. We are now competing simultaneously with the US, with rapidly growing markets in Asia, and with renewed competition—some of it motivated perhaps more from a regulatory perspective than a competitive perspective—from European financial centres.

Q Do you think there is a disconnect between the Government’s stated ambition to become the world’s first net zero financial centre and the actual levels of green finance in the UK today?

William Wright: Part of that question relies on how you measure it, so I can only speak to how we at New Financial have measured it. We recently looked at and reviewed green finance activity—more specifically, green capital markets activity—in the UK and the EU. We found that, on two key measures, the UK is actually significantly behind the EU, which suggests that there is a disconnect between the widely accepted and widely stated position that the UK is already a global leader in green finance, and the widely received ambition to become the leading international green finance centre.

We looked at it in two ways. First, when you look at the UK’s market share of European activity in green finance, across equity bond and loan markets, it is about 14% of all EU plus UK activity. That is significantly lower—significantly lower—than the UK’s share of other capital markets and financial services activity. On a narrow definition of capital markets, the UK has a share of about 20% or 22% of EU 28 activity; on a broader definition of banking and finance, it has a share of just over 30%. Strictly in green finance, the UK has a share of half to two thirds of where you would expect it to be.

We also looked at the penetration: what percentage of equity capital raising—loan market and bond market capital raising—is green, in both the UK and the EU? In every single sector that we looked at, the UK lags behind in terms of green capital raising as a proportion of total capital raising. To give an indication of scale, last year roughly 20% of all capital markets activity in the EU was green; in the UK it was 9%.

There is a disconnect. I think there is an opportunity for the UK to catch up, but there is, shall we say, quite a lot of catching up to be done.

Q On the catching up or lagging behind that you have mentioned, would you recommend any legislation? Is there a role that the Bill we are discussing could play to strengthen us and pull us forward?

William Wright: There is certainly a role for legislation; I am not sure that the right place for that role is this Bill in particular. It is important to step back and look at the huge amount of work that has already been done and is being done in and around green finance from a legislative perspective. The latest addition to that is the net zero review, and the green finance strategy is expected from BEIS early next year, maybe. There are sustainability disclosure requirements, the UK green taxonomy and the transition plan taskforce. That work, which is coming down the pipeline towards us, could contain a lot of the legislative impetus for the UK to close the gap.

More importantly, I think the industry is already beginning to fill the gap. Where the UK has a real opportunity in green finance in future is not so much in the level of capital raising by UK companies, but in the fact that it is in pole position to benefit from its existing expertise in markets such as risk management, derivatives and trading, as we see the emergence of a more sophisticated carbon market of green derivatives and green risk management, and in playing to its existing strengths, many of which have not been harmed or damaged in any significant way by Brexit.

Q I know that your website describes one of your key aims as developing a larger capital market across Europe. There is a trick to be pulled off in encouraging all the right kinds of people to come and invest in your financial markets while keeping the wrong kinds of people out. How effective has the UK’s previous regulatory regime been at keeping Russian money out of our financial markets?

William Wright: On the substance of that question, I will have to put my hands up and say it is not an area that we have done a huge amount of work on, although we have recently hosted some events on that theme—for example with Edward Lucas, talking about Russia, Ukraine and links back to the City.

One point I will make is that back in 2007, in a previous life as a financial journalist, I was at the official launch of NYSE Euronext—this was the merger of the New York stock exchange and Euronext, the European-based stock exchange. The founding chief executive, John Thain, who was then chief executive officer of NYSE, said he thought that London would come to regret its campaign in the previous five or six years to attract Russian companies to list on the London stock exchange. If we look back on those comments with the benefit of 15 years of hindsight, he was probably correct.

Q A number of transparency and anti-corruption campaigners regularly say that London has become or is in the process of becoming one of the go-to locations of choice for money laundering and similar activities. Is that a concern that you think is grounded in fact? Or is it just an urban myth with nothing behind it?

William Wright: I will have to fall back on saying that it is not something I have specific expertise on. I have opinions and views. I have recently read some of the works by Oliver Bullough on different aspects of this—“Butler to the World” and “Moneyland”—and it made me quite angry to read them, but it is not an area where I can claim any professional expertise to answer a question in this setting.

Q Good afternoon. I will pick up on a few things in respect of the competitiveness of the UK financial markets. Our competitiveness is really important for our economic growth; do you think the Bill goes far enough with regard to the deregulation of existing EU rules? When it comes to new regulation, does the Bill enhance the ability of Britain’s financial services to be agile and dynamic and to look at the best possible outcomes? We are very good in Britain at gold plating our rules and regulations, so we need to make sure we are not putting ourselves on the back foot and can be the most competitive, agile, dynamic market.

William Wright: That is sort of the trillion-dollar question, isn’t it? On EU rules, the Bill and the huge amount of work that the Treasury and others have done over the past three years address the obvious low-hanging fruit—the obvious areas of EU regulation and the framework that were not appropriate for the UK market, which has a unique dynamic within the EU. Most of those areas have been well addressed in the Bill.

On looking ahead at competitiveness, the Bill does create a more agile and nimble framework. By definition, one would hope that the UK can act more swiftly than the EU, and we are already seeing some signs of that. Again, it gets the right balance by making competitiveness a secondary objective and not a primary objective. It gets the right balance to ensure that it is something considered by supervisors and regulators but not something that overrides the fundamental purpose of supervisors to ensure a stable financial system that is competitive within itself, and where customers get appropriate protections.

We need to be very careful, in the debate on competitiveness, about assuming that competitiveness is a mechanical outcome of regulation and tax. One of the lessons we can take from the last few weeks is that a very important element of competitiveness is credibility, predictability and the robustness of independent institutions. It is important to bear that in mind when we talk about competitiveness.

In the short term, the biggest competitiveness threat to the UK—this comes back to the Minister’s opening question—is probably from additional pushback and pressure from the EU as it requires more EU business to be conducted inside the EU. We have this interesting dynamic: the UK is increasingly focusing on making people want to do business in the UK because it is an attractive environment, whereas the EU in many areas is trying to attract business by requiring people to do it there. We also need to be very careful in this debate—

Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions. I thank our witness on behalf of the Committee.

William Wright: Thank you.

Examination of Witnesses

Robert Kelly and Robin Fieth gave evidence.

Q We will now hear oral evidence from Robin Fieth, chief executive of the Building Societies Association and director of Co-operatives UK, and Robert Kelly, CEO of the Association of British Credit Unions Ltd. For this panel we have until 3.55 pm. Would the witnesses please introduce yourselves for the record?

Robin Fieth: My name is Robin Fieth and I am chief executive of the Building Societies Association. We represent the UK’s 43 mutual building societies and seven of the large credit unions.

Robert Kelly: Good afternoon, everyone. My name is Robert Kelly and I am CEO of the Association of British Credit Unions Ltd. We represent 157 credit unions across Great Britain—roughly 62% of the market.

Q Thank you, Robin and Robert. This is a general question. The Bill’s objective is to bring the rulebook up to date nearly quarter of a century after the last piece of ab initio financial services legislation, the Financial Services and Markets Act 2000. There is obviously a lot in this Bill; I invite you to comment in general on how you think it achieves the objective of creating a competitive, well-regulated and vibrant sector. The Government are very supportive of a diverse range of financial services providers, which includes both of you, representing building societies, credit unions and co-operatives, and I am personally very supportive of that.

I would like to ask questions in both directions, if I may. First, does this legislation go far enough to meet your objectives? When I was in front of the Treasury Committee a week ago, I was challenged on the fact that it might give a greater ability to sell a broader range of products. That question came specifically in the context of co-operatives and credit unions. Do you have the necessary expertise and the regulatory rulebook to do that without prejudicing consumers? Sorry, there is a lot there, but hopefully that gives you something to open up with, and we will then hand the questioning to colleagues.

Robin Fieth: Shall I go first? We will try not to talk over each other. Thank you very much for the question, Minister, and thank you for inviting us this afternoon. From the very start we have been a strong supporter of the financial services framework review, and particularly of adherence to the original FSMA principles of setting a framework in legislation and delegating the vast majority of the detailed work to regulators.

On the first part of your question, the Bill largely achieves that objective. We can always ask for more. The areas in the framework side where we may be looking for further advancement are around, for example, the terms of reference or the operation of the Financial Ombudsman Service, as the third part of the regulatory framework. Within that, we have been very strong supporters of the PRA’s “strong and simple” initiative, which is a manifest example of how we move away from the single banking rulebook—the EU body of legislation —in a way that fosters real diversity in financial services and allows us to have a far more proportionate approach to the smaller, simpler, UK-based domestic organisations, like building societies and smaller banks.

On the third part of your question on enabling services, I would observe that the UK’s traditional approach to credit union legislation has been very much on a permissive basis: credit unions are permitted by legislation and regulation to do specific things and specifically not to do anything else. Perhaps the question that the Committee might like to consider more is the extent to which we can empower credit unions better to achieve their service to society and the communities that they are there to service, recognising that there is a regulator to make sure they do not stray too far. Those are my introductory comments.

Robert Kelly: Thank you for the opportunity to contribute today. I echo Robin’s comments in the round, in terms of the general objectives of the Bill. I welcome the opportunity to see, in a post-Brexit world for the United Kingdom, that there is a movement towards regulation and a legislative framework that is proportionate and delivers excellent consumer outcomes. That is certainly something we would echo every day of the week, so it is to be welcomed.

In terms of whether the legislation goes far enough, to echo Robin’s comments again, we have engaged on additional items with HM Treasury officials and regulators in recent times. We respect the fact that we are on a journey and that we have to ensure that a proportionality clause is applied. To go back to the Minister’s comment about whether we have all the expertise and whether the Bill goes far enough, I think those two things go hand in hand. We need to make sure that we continue to showcase the ability of the credit union sector to be a genuine competitor within financial services, that our mutuality and co-operative values shine through, and that we deliver excellent consumer member outcomes.

There are a couple of particular items that we referenced in recent conversations. We have to remember that the legislative reform agenda for the Credit Unions Act 1979 has been going on for a long time. We respect the fact that this is the most significant change since the Act itself in 1979. We are on an innovation journey and we firmly respect the fact that we need to continue to engage with all stakeholders, so we are delighted to see the possibility of additional new products and services being available to the credit unions that want to take advantage of the opportunity to provide them. Hopefully, credit unions can garner a wider share of financial wallets across households throughout the country and make sure that we serve more than the 2 million people we currently serve—that that number continues to increase.

There are a couple of examples that we have talked about. We believe there is a need for a future conversation around the common bond field of membership reform—something we have flagged to HMT already—and also around the possibility of innovation for credit union service organisations. That model is so prominent in and brings many, many advantages to the North American credit union system.

Lastly, in terms of the question about expertise, on the basis that we have had a long-standing conversation around legislative reform, we have been proactive in the background to make sure that we talk to our member credit unions, in conjunction with the BSA and other trade bodies and interested parties, to make sure we have the relevant conversation behind the scenes. We are preparing the ground for credit unions to understand that with the opportunity for new products and services come additional requirements around good consumer outcomes, compliance requirements and in-house training and development. That is something we have been doing in tandem with the legislative reform agenda.

I am firmly confident that we will be able to hit the ground running quickly as and when the legislation goes through both Houses, and that we have the ability then to expand our product and service range and make sure we can serve many more people with ethical finance across the UK.

Q Compared with the US or the rest of Europe, in the UK we lack mutually and co-operatively-owned regional banks. You have touched on this already, Robin, but I want to hear a bit more about why you think that is. What is the role of regulators when it comes to that lack of access?

Robin Fieth: The first thing is to look at the tradition—the tradition of the UK has been that our regional mutual financial institutions have either been insurers or building societies, traditionally, or, in the last 30 or 40 years, credit unions—compared with the United States or large parts of Europe, where there is a very long tradition of mutually-owned community banks, co-operative banks, lifelines and so forth. Our tradition is very different. Apart from the Co-operative bank, we have never had a large, mutual, fully general-purpose bank. Nationwide is a full retail bank, but it does not do business lending, for example. We have never had that tradition.

As some of you will know, there are a number of small community banks in the mobilisation phase or coming to mobilisation phase. On the second part of your question, the Bank of England’s new banks team has been very good at helping challenger banks to get through the process and start up, and we have seen so many start up. I am not sure that they have the same experience and expertise in respect of what the mutual model looks like and why it is different. If you talk to any challenger bank, they will say it was much more difficult to get through mobilisation than it should be. If you talk to the community banks, they say it is very difficult to get through mobilisation. There are at least three that we are working with on the side, if you like, that are going through that process.

The real challenge, where perhaps there is a role for Government, is in creating the forms of capital that mutual start-ups can follow, because they cannot be venture-capital backed, so you need some form of mutual capital. We have suggested to both the main parties, for example, that whichever version of the British Business Bank you want, it could have a mandate for part of its capital being mutual capital.

Robert Kelly: Robin has covered the vast majority of the salient points, and we would agree with his comments. In terms of taking it maybe a step further or down in respect of the community banking model, as Robin mentioned there is a development agenda in a few areas of the country. There is certainly space for innovation and competition in SME lending and around transactional activity and transactional accounts and making sure there is something different from a competition perspective —maybe where the bigger banks are not necessarily in those spaces or where there is perhaps an opportunity for some more partnership and co-operation. We have talked to some of the community banking models about what space they and the credit union sector could co-exist in. We acknowledge that credit unions are already able to do corporate lending and SME lending, and some have done so. I think around 20 or 21 credit unions across the country have taken advantage of that. The ongoing PRA consultation on the future supervision and regulation of the credit union sector has some reference to that, in terms of additional checks and balances.

We recognise that there is opportunity for the credit union sector to do more. A big part of the legislative reform package that will ultimately impact credit unions can be described as an enabling factor that allows product and service innovation and development. Alongside the community banking and mutual banking model, the development that we have seen, and all the background that Robin has already mentioned, it should be made clear that we in the credit union sector believe that we can also fill some of that space. If the overall objective is around competitiveness and enabling competition, we should be ready to act, and to respond to the needs of communities and small businesses across the country.

Q Mr Fieth, let me first come to you and the comment that you made previously about the UK not really having a tradition of mutually owned lending banks. Was not the first trustee savings bank set up in Dumfriesshire in 1810? There has been a very long and proud tradition of locally and community-owned banks, which survived for a long time. They were basically wiped out in a series of corporate takeovers in the 1970s and ’80s. Is that not the case?

Robin Fieth: Whether the term is “corporate takeover” or “demutualisation”, which was very much encouraged by the Government of the day, is a moot point, but you are absolutely right: there is or was a very proud trustee savings bank tradition, and of course it started in the lowlands—well, the borders—of Scotland. Sadly, the last trustee savings bank went into run-off within the last five or six years. That was the Airdrie Savings Bank. It is a tradition that we no longer have. Again, those institutions were not a full service of the kind that the shadow Economic Secretary was talking about. They were not a full service model. They were very much a savings and loans model, largely for retail purposes. That is the tradition we had, yes, but it is now sadly part of our economic history.

Q Thank you. Mr Kelly, a lot of the evidence that we heard earlier today—I do not know how much of it you were able to watch—came from the big institutions, which clearly have a large part of UK exports—a significant part of the UK economy. Could you briefly explain the importance of credit unions, particularly with regard to the promotion of financial inclusion?

Robert Kelly: Yes, of course; thank you for the question. Credit unions play a unique role in the economic infrastructure of this country. I mentioned that we serve 2 million people, but we have huge aspirations to make sure that that goes much further. After this session, I am joining a call on the cost of living crisis and the impact that the credit union sector is having in different parts of the country. A really good example is Bradford District Credit Union, which is working in tandem with the local authority on a range of products and initiatives that have built financial resilience and financial inclusion in that part of the country. There are many more examples across the UK.

The financial inclusion agenda chimes perfectly with our objectives, our ethics and the co-operation and mutual model that credit unions are built on. The important point to state is that we believe that that work can be accelerated and amplified in a significant way. We can do much more. The phrase that we would use is that we manage to put in place a balanced demographic of membership. The credit union should be seen as a safe and innovative place for any member of society, any consumer, to go to. It goes back to the comment that Robin made on full service. We believe the legislative reform package that is on the table for the credit union sector will allow us to do that. It will allow us to be more competitive, to look at risk-based pricing and to make sure that we are seen as more mainstream—and to serve a wider part of the population. Doing that creates an environment where additional financial inclusion initiatives and objectives are made possible, because we are building sustainability and the strength of balance sheets for credit unions across the country; those things go in tandem.

We have worked closely with a range of Governments over many years to deliver great value, and also financial inclusion objectives, but we need to make sure that there is a balance of products and services, and a balanced demographic that allows us to do much more of that. We have said that in the past, credit unions have unfortunately been seen as the poor person’s bank. We have worked incredibly hard to move away from that area—with, I think, great success. The legislative reform package that is on the table for the credit union sector will allow us to do much more, and it should be seen as very positive.

Q Thank you. You referred to the need to be competitive. When earlier witnesses used that phrase, they often clarified it with reference to overseas businesses or overseas financial services sectors. When you talk about being competitive, who are you competing with? Is there anything in the Bill that helps you to become competitive, or is there anything that could be added that would help?

Robert Kelly: I will give two examples. Credit unions will have, for the first time, the ability to offer car finance under personal contract purchase or hire purchase—conditional sale activity. We can also be immersed back into the general insurance mediation process. That means that we can diversify our product range. It should mean that we can diversify our income lines, which should result in greater sustainability for the sector. Those are two examples where we were very firmly part of the legislative programme that has been developed for the credit union sector.

On competition, we recognise that we are a small player overall in the financial services landscape, but we can do more, and have huge aspirations. We have that wider product and service range. Investment in technology will allow us to be seen as being more mainstream. A bigger part of the financial wallet for many households across the country could be maintained by the credit union sector. The Bill certainly has its elements there.

We talked about credit union service organisations. It is important that we continue to have that conversation with all relevant stakeholders, look at where in the sector there is innovation in the overall infrastructure, and consider how we can learn from the successes of the model used in North American and other parts of the world. The Bill goes a long way to allowing us to diversify, and to become more competitive and more mainstream. That is to be welcomed. There are certainly follow-on elements that we will undoubtedly talk to officials and regulators about in the weeks and months ahead.

Q According to the Financial Conduct Authority website, in just over the last year, eight credit unions have gone into administration; only one did in the preceding three years. Is there something about the current financial services sector, or about the credit union model, that means there is a systemic problem? Or is it simply that, if we move from having a small number of big players to a large number of small players, inevitably we will lose some of the small players?

Robert Kelly: We recognise the difficulties in terms of reputational risk, and the challenges that failure brings. We are working tirelessly with our member base. We are a very broad church. Our members have asset sizes from a couple of hundred thousand to well over £220 million, and everything in between. We recognise that failure is difficult and painful. We are working extremely hard behind the scenes collaboratively with the BSA and other interested parties. Credit unions that fail often have a couple of items in common. There tends to be a lack of good governance, and sometimes there is key person risk. Covid has exacerbated some of that, just in terms of volunteer burnout and sustainability challenges, demand for lending and bad debts. We have been impacted by insolvency and mis-selling in many cases as well. We have identified that it can be difficult to maintain a smaller asset range using a volunteer base—not always, but sometimes. We are working tirelessly behind the scenes to make sure that credit unions look at their business plans and numbers on a regular basis, and take the tough decisions.

Let me bring that to life, very quickly. The original development of the fiscal principles was in 2002. In that year, we had 698 credit unions in GB; we are now down to fewer than 250. Most of that reduction in numbers came through consolidation and mergers or acquisitions. Some of it has been failure. We certainly believe that the number will continue to come down. It would be appropriate to find solutions that allow credit unions to come together as part of mergers or acquisitions and maintain services in their local communities.

Q Would both our witnesses support giving the FCA and the PRA an explicit remit to report on how they have considered specific business models—including credit unions, building societies and mutual and co-operative regional banks—to ensure that they are given parity of esteem with other providers? If so, how would that support your sector?

Robin Fieth: That is a great question; thank you very much. We are already part of the way there with the PRA. It has had a secondary competition objective since the 2014 Act, and it was subsequently enhanced at the BSA’s behest. Every time it consults, it has an obligation and a requirement to determine whether there are specific aspects that disproportionately affect the mutual sector, and that has been welcome. We have seen a real change in the PRA’s approach to the financial mutuals since the financial crisis, and it has been largely positive.

There is a very important question as far as the FCA is concerned. We saw it last year with the proposed demutualisation of LV. It was apparent that the FCA was entirely agnostic on the business model, in terms of their competition objective and the good competition that achieves better customer outcomes on the conduct side. There is certainly a case for the FCA to consider that far more closely. I am always very careful when we talk about conduct outcomes with the FCA because, as a consumer, you should not have a different outcome, but you might experience a different journey. There are some nuances in there. As to how it best achieves that without adding ever more reports and burdens, that is in its annual reports, which are obviously open to examination and scrutiny. In the regulator’s annual reports, it should report back on that; that would be the most straightforward way to achieve that.

Robert Kelly: Thank you again for the question. I echo Robin’s comments, but I will try not to duplicate them. Credit unions have an ongoing consultation with the PRA on future supervision and the regulatory environment. We have a long track record of working in tandem with the PRA, and there is a move towards making sure that the supervision model is in tandem with the legislative reform agenda, which seems eminently sensible. It also allows us to take cognisance of the fact that there are many more larger, asset-based credit unions than there were five or 10 years ago—we have to factor in whether that comes through consolidation, or just through business growth—which is hugely beneficial for all parties.

In terms of the FCA, obviously the credit union sector is dual-regulated. We have a relationship from the conduct side. It will be interesting to see how that approach develops. Again, I would echo Robin’s view: the FCA has such a broad remit, in terms of the firms that it looks after, and we are always championing the cause of proportionality. Consumer duties are an example of where we have to work in collaboration with all relevant stakeholders and interested parties to make sure that the good consumer outcomes that credit unions provide can be evidenced, and that we can go on that journey. There are live examples of those on both sides of the regulatory environment taking steps to be innovative and to future-proof the business development that we expect to see through this legislative programme. That is to be welcomed, but we are on a journey, and we are not yet at the end.

Order. I am afraid that brings us to the end of the allotted time for this panel. On behalf of the Committee, I thank our witnesses.

Examination of Witness

Mike Haley gave evidence.

We have until 4.10 pm for this panel. Would the witness please introduce himself for the record?

Mike Haley: Good afternoon. I am Mike Haley, chief executive officer of CIFAS, the UK’s fraud prevention service. We are a not-for-profit membership organisation of 600 members. Member organisations are, in the main, financial services—banks, fintechs, alternative lenders and mortgage providers. We also share data and intelligence on fraud and financial crime.

The Chair